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By Daniel Pimlott Published: January 5 2011
Impact on other big economies is unclear
Britain is not alone in raising its sales tax as soaring budget deficits have prompted emergency measures to raise revenue, writes Daniel Pimlott. At least 12 European countries have raised value added tax since the financial crisis, according to TMF Group.
Fears about raising VAT in the aftermath of a downturn stem in part from the view that Japan’s 2 percentage point rise in 1997, to 5 per cent, played a part in pushing it back into recession. Japan’s dismal growth rate appears to offer a cautionary tale for all who seek to raise consumer taxes in a downturn.
But the evidence from Japan is mixed. Consumption fell sharply after the tax rise, but there were other factors involved. At about the same time, income tax cuts expired and the government reduced health subsidies and spending on public works. Big problems in the banking sector also emerged soon after. The impact of the VAT rise was probably made worse because many retailers chose to add the tax at the till, where the sudden price jump may have deterred purchases.
Germany offers an equally questionable counter-example. In 2007 VAT there rose from 16 per cent to 19 per cent.
The Bundesbank estimates that the rise in prices reduced domestic private consumption by just 0.5 per cent that year, but in general the economy shrugged off the tax increase.
The UK itself experienced a rise in VAT at the start of 2010. Last year the Office for Budget Responsibility estimates there was 1.1 per cent growth in household spending – about half what it was in the three years before the crisis hit.
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