Policy Exchange warns that VAT rise could damage economic growth

A new report from policy Exchange - authored by their Chief Economist Andrew Lilico and also Hiba Sameen - contains the surprising conclusion that an increase in VAT may be more damaging to economic growth than a rise in the basic rate of income tax. Yesterday's FT covered this.

The Telegraph's coverage of the PX report focuses on the implications of Alistair Darling's decision to increase National Insurance rates: "The Treasury's own economic model suggested that a 2p rise in employers' National Insurance could reduce GDP by a full 2pc after three years. The Government is set to increase NICS by 1pc from next April."

Lilico recommends that the dynamic effects of tax rises are given more consideration by policymakers:

"Much of the media discussion of potential tax increases is based on the static estimates presented in the Treasury’s Ready Reckoner. However, these estimates don’t do not measure the dynamic effects of tax rises and in most cases don’t include behavioural responses either (the basic rate of income tax is one such exception). We find for example, that a 2p increase in the basic rate of tax would raise roughly the same amount as estimated by the Treasury in year one (£56 billion). But after three years it might raise 2.1 billion less than the Ready Reckoner suggests, because growth would be lower and unemployment higher as a result of the tax rise."

The TaxPayers' Alliance has welcomed the report, arguing that it confirms its view that Britain needs big spending cuts rather than tax rises.

More at Policy Exchange.