Page last updated at 17:16 GMT, Wednesday, 17 December 2008

MPs reject bid to reverse VAT cut

Supermarket in Bristol
Retailers have been encouraged to pass on the cut in full

MPs have rejected attempts to scrap the 2.5% VAT reduction which came into effect this month.

Lib Dem MP Vince Cable led attempts to overturn the temporary cut, which he said was "seriously defective" as a way of getting money into the economy.

His bid was backed by the Tories and Labour ex-minister Frank Field but was rejected by 303 votes to 223.

Ministers say the VAT cut is "right for the UK economy" but former minister Lord Jones has also criticised the cut.

The Lib Dems moved a motion to annul the reduction in VAT from 17.5% to 15% until the end of 2009, a move designed to boost consumer spending.

Contentious measure

It came into force on 1 December. Had the government lost the vote ministers would have been under pressure to respond immediately and confirm whether it would be reversed.

Opening the debate, Mr Cable said he agreed with the concept of a fiscal stimulus but said the VAT cut "was a bad one".

I believe cuts in VAT is likely spitting in the face of an economic hurricane
Frank Field
Labour backbencher

He said tax cuts and increased public investment would be a better way of putting money into the economy and pointed to the administrative costs on smaller businesses of implementing the cut.

In a reference to Chancellor Alistair Darling's explanation in the pre-Budget report about why the VAT cut was the best option, Mr Cable told MPs: "Our view is that this isn't the best, isn't the fairest, it won't help everyone and it certainly won't give back 12.5bn back to consumers."

'Ineffective'

He questioned how much a 2.5% drop would be likely to influence the behaviour of a "rational consumer" and said the effect was "invisible" at a time when shops were already discounting goods "aggressively".

Philip Hammond, for the Conservatives told MPs the VAT cut was "the prime minister all over, unaffordable and ineffective".

He said Mr Brown was committed to a "reckless exercise that will increase debt through yet more borrowing" to fund a temporary VAT cut which nobody but Mr Brown thought would be effective.

This is the right stimulus for families, it's the right stimulus for businesses and it's the right stimulus for the UK economy
Stephen Timms

The temporary cut would have to be followed by a "massive increase" in taxation which would threaten any recovery, he said.

Labour MP Mr Field, who led a backbench rebellion against the abolition of the 10 pence tax rate earlier this year, told MPs he would vote against the government.

"I believe cuts in VAT is likely spitting in the face of an economic hurricane I don't believe it will have any effect whatsoever, given that firms are already cutting prices by up to 50% in an attempt to survive," he said.

20 saving

He told MPs "nobody doubts" the government's intentions to protect people from the economic downturn but said many businesses faced closure, threatening more jobs.

"I believe unless we radically change the credit life lines to many firms, there will be a considerable number of our constituents who will not have firms to go to after Christmas."

The VAT cut was also criticised later in the House of Lords by Lord Jones - a crossbencher who stepped down as trade minister in October.

He asked why "it has been necessary to spend 12bn of taxpayers' money by knocking 25p off a Christmas present through VAT and not putting it in to ensure that we actually preserve people in jobs in this country".

For the government Mr Timms said the VAT cut was a fair way to deliver money to the economy because low income households spent a larger share of their income on VAT than richer households.

He also said tax cuts would not help those who do not pay income tax, such as pensioners.

The average household spent 900-a-month on VAT-rated goods and services and would save around 20 a month, he said.

He said the Conservatives would "turn their backs on families and businesses".

"This is the right stimulus for families, it's the right stimulus for businesses and it's the right stimulus for the UK economy," he said.

Ministers say the VAT cut is just one of a number of measures announced in recent months to help businesses and families through the downturn.

The VAT row intensified last week following criticism of Gordon Brown's economic policies by two German politicians.

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