Ed Balls calls for emergency tax cut

Ed Balls has called for an emergency tax cut (Getty Images)

Shadow chancellor Ed Balls has called for an emergency tax cut - urging the Government to reduce VAT temporarily to "kick-start" economic recovery.

Accusing George Osborne of risking permanent damage to the economy by pressing ahead with stark austerity measures, he said the Chancellor needed to act to boost confidence.

Reducing the sales tax back to 17.5% for a period would help to stimulate consumer spending, bring down inflation and boost job creation, he argued in a keynote speech.

Mr Osborne raised VAT to 20% from January.

"The question is not the cost to George Osborne of paying for this temporary emergency tax cut, but the price our country will pay if he carries on regardless," he said.

"Slowing down the pace of deficit reduction with a temporary VAT cut now would give the flat-lining economy the jump start it so urgently needs, boost jobs and be a better way to get the deficit down for the long term."

In an address to the London School of Economics, Mr Balls accused the Chancellor of "keeping his fingers crossed and stubbornly ignoring the economic evidence" that his plan is not working.

He drew a parallel between Mr Osborne's refusal to produce a "Plan B" with the ill-fated decision by the Conservatives to enter the European Exchange Rate Mechanism (ERM) in the 1990s.

"George Osborne risks joining the ranks of chancellors, finance ministers and economists who should have known better, but allowed political imperatives to trump economic realities," he said.

"I do not believe this is economic judgment at work - but a political gamble with the nation's economy from a Chancellor shaping his policies not around constitutional responsibility, sound economics and the protection of jobs, growth and homes, but around a fixed political strategy to win an election in 2015."

Unlike his predecessors ahead of the UK's withdrawal from the ERM on Black Wednesday in 1992, the Government has the option to change course, Mr Balls said.

While Labour made some mistakes - notably in failing to regulate the banks sufficiently, blaming it for today's problems was a strategy "based on total fiction", he insisted.

"The path that our economy is being taken down is the wrong one, as the evidence is increasingly suggesting," he concluded.

"It could prove very damaging for growth, for jobs, for public services, for living standards, for the deficit and for interest rates too.

"At the very least, it looks set to be a path of slower growth and higher unemployment than would have been the case.

"There is an alternative. It is more credible than the current plan, not less, and it is not too late to change course.

"But George Osborne must put the national interest first and stop trying to score cheap political points by blaming Labour for all his problems."

Mr Balls also took a swipe at the International Monetary Fund (IMF), which last week gave its approval to the Government's deficit-reduction strategy.

The acting head of the IMF, John Lipsky - who appeared alongside Mr Osborne to deliver that verdict - had been among experts backing Britain's continued ERM membership in 1991, he said.

"He was far from being alone in the City in holding those views. But the consensus of that time was not right. Political support crumbled, credibility collapsed and the pound was withdrawn," he said - pointing as well to David Cameron's position as a special adviser to chancellor Norman Lamont at the time of Black Wednesday.

"The fundamental problem with George Osborne's deficit plan is that he has set a political goal to a political timetable which defies economic logic," he said.

"And the lesson of monetary policy - and fiscal policy too - over the last 20 years is that changing course when things aren't working isn't knee-jerk and doesn't damage credibility; it's the only way to stay in control of your destiny and avert a crisis before it's forced upon you.

"It is because George Osborne has from the beginning had the flexibility and discretion to set a new and credible course that I find it so frustrating that he has boxed himself in and now has to ignore the mounting evidence by sticking stubbornly to his guns - making the Major-Lamont ERM mistake all over again.

"Every time he says he can't change course, he makes it harder to do so - and increases the pain of lost jobs and lost growth.

"As I argued last week, the cautious thing to do is not to plough on and simply hope for the best. The cautious thing is to act - and to act now - before any more ground is lost."

Conservative Party deputy chairman Michael Fallon said: "It is extraordinary that Ed Balls has chosen to personally attack the head of the IMF.

"Not only is he defying his own leader in refusing to accept responsibility for the mess that Labour created, he is now attacking anyone that disagrees with him.

"Only last night the Governor of the Bank of England made clear that it made no sense to change our economic policy. Ed Balls' Plan B of increased spending and unfunded tax cuts at a time when we have a similar deficit to Greece and Portugal looks like a plan for bankruptcy."

The Governor, Sir Mervyn King, said last night that the UK economy was on the right course to return to stability following the financial crisis but warned it was in the middle of "seven lean years".

Mr Balls however, in his first major speech on the economy since being appointed shadow chancellor in January, warned that the UK was beginning to travel down the same path to economic disaster as countries such as Greece, Ireland and Portugal.

They had pursued similar courses as Mr Osborne, he argued, pointing to successive VAT rises in Portugal in the last year.

"What they, Ireland and Greece have all discovered - just like Argentina, Brazil and Turkey before them - is that it doesn't matter how much they cut spending or how much they raise taxes; if they can't create jobs and growth, their debt and deficit problems get even worse and market confidence falls further still.

"My concern is that we are starting to see the same thing happen here in Britain.

"If the economy isn't growing, there are fewer jobs and fewer people in work than there should be, fewer taxes paid and more benefits claimed - which makes it progressively harder to get the deficit down."

Downgraded growth forecasts were not just bad news in the short term, he said.

"I fear it will make it harder to get the deficit down - and undermine long-term credibility, investment and confidence at precisely the wrong time."

The TaxPayers' Alliance, which campaigns for lower taxes, gave a cautious welcome to the VAT proposal - noting it did not want cuts now to fuel steeper rises later.

But director Matthew Sinclair suggested it could be paid for by cutting overseas aid budgets or the high-speed rail project.

Tom Clougherty, executive director for the free market Adam Smith Institute think tank, said Mr Balls was engaged in the "pure politics" for which he criticised Mr Osborne.

"A temporary cut in VAT would do little to boost confidence or growth. People aren't fools - they know that you can't just borrow more, spend more, and raise less without it coming back to bite you further down the line.

"A growth agenda that coupled lower taxes with less red tape and less wasteful spending would be a good thing. But the shadow chancellor's reckless, have-your-cake-and-eat-it-too approach to the economy would do nothing except march Britain further down the road to a sovereign debt crisis."

Mr Balls though insisted the previous government's move to cut VAT to 15% for 13 months had been effective and was backed by the influential Institute for Fiscal Studies.

"At the end of each month, millions of families did see extra money in their pockets, and thousands of businesses saw the difference in their bottom line," he said.

"As the IFS has said, it proved an 'effective stimulus'. And the economy received a much-needed injection which helped it return to growth, led unemployment to fall and saw the deficit come in £21 billion lower than expected."

Answering questions following his speech, Mr Balls said VAT was his preferred tax for Mr Osborne to cut because "he has got to choose the measure which has the quickest impact".

"He can reverse it from 20% to 17.5% immediately and it has an immediate impact on people's purchasing power and the bottom line of businesses," said the shadow chancellor.

"I think the evidence is getting pretty clear George Osborne needs to do something quickly. If he wants to do something quickly that will work, he should cut VAT."

Mr Balls accepted that Labour was "culpable" for mistakes for which it should apologise in its time in power, such as the failure to regulate banks more tightly.

And he agreed that not every penny in the previous government's budgets was well-spent, citing the repeated reorganisation of NHS primary care trusts as something that was "destabilising and wasteful".

But he rejected Mr Osborne's argument that excessive spending by Labour is the reason for the UK's current problems with its deficit.

"The charge that Labour's profligacy and waste in spending caused the deficit or caused the crisis is just not true," said Mr Balls.

He sought to shrug off demands for him to admit over-spending under the Blair and Brown administrations, saying: "I think rather than having a debate about 'the past - good or bad?', we should focus on where the country is going and whether George Osborne is taking the right or wrong choices."