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Labour and the Conservatives have both ruled out raising VAT in the next parliament, as scrutiny of the two main parties’ tax plans intensified in the general election campaign.
Chancellor Jeremy Hunt said that increasing VAT would “hammer families’ finances and push inflation back up”, as he vowed his party would not raise the tax on products and services.
Writing in The Telegraph on Wednesday, Hunt hinted at the possibility that Labour was planning to hike VAT if it wins the election on July 4, highlighting that opposition leader Sir Keir Starmer and his shadow chancellor had repeatedly refused to comment on the matter in recent days.
He contrasted the omission to Labour’s explicit pledge to rule out income tax and national insurance rises.
Rachel Reeves, shadow chancellor, called Hunt’s words “absolute nonsense” and added VAT to her party’s tax pledge, saying: “Labour will not be increasing income tax, national insurance or VAT.”
A Tory spokesperson accused Labour of having “only caved in” due to pressure from Conservative campaign headquarters.
Paul Johnson, director of the Institute for Studies think-tank, said in response to the pledges: “We’re getting so many promises not to do things, and so little focus on the scale of the challenge that whoever wins is going to have.”
Economists have predicted that un-ringfenced areas, including courts, prisons and local councils, could face spending cuts of up to 4 per cent in the next parliament without significant new funding. Labour has promised not to borrow to fund day-to-day spending.
Johnson highlighted that income tax, national insurance and VAT accounted for two-thirds of all tax revenue collected in the UK, meaning the two main parties have left themselves little room for manoeuvre.
The next government could still raise revenue by reducing tax relief on pensions, increasing the levy on banks, or amending the rules around capital gains tax, he said.
However, Johnson warned: “The more you say you’re not going to do X, Y and Z, the more you’re pushed into these slightly more niche, often less transparent, sometimes economically inefficient areas”.
Reeves will have to implement “hard spending cuts” or raise taxes to stick within her own fiscal rules, Johnson said.
Attention also turned on Thursday to what the two main parties would do about tax thresholds, after a Labour shadow Treasury minister misspoke twice on the issue.
Darren Jones, shadow chief Treasury secretary, told BBC Radio 4: “Income tax, national insurance, VAT thresholds — all of these, the current status of affairs, will not be changing under a future Labour government.”
He repeated the suggestion, saying of his party’s position: “Income tax, national insurance, VAT — tax thresholds on those measures of tax will not be changing under a future labour government.”
However, Labour officials swiftly signalled Jones had misspoken and clarified the party’s pledge was about income tax, national insurance and VAT rates, which it has vowed not to raise, not thresholds.
Hunt suggested on Thursday that the Conservatives would retain their existing plan to freeze income tax thresholds until 2028 before raising them.
The move would mean that millions more people will be dragged into paying any income tax, or higher rates of income tax, over the next four years as wages rise due to inflation.
The chancellor told the BBC: “I can absolutely undertake that the threshold freeze that we introduced until 2028 will not continue after that.”
Hunt’s remarks could offer Labour cover to follow suit by freezing income tax thresholds for the next four years, in a move that would be branded a “stealth tax” by critics but would raise significant sums for the exchequer.