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Reduce VAT to help improve economic growth

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A leading business group has urged a targeted cut in VAT to boost business performance.

The Federation of Small Businesses (FSB) has called for specific cuts in VAT rates in order to support confidence in key areas of the economy.

The FSB’s latest survey of business confidence indicated that optimism about the future has suffered a severe dent among smaller firms, a situation not helped by the hike in VAT to 20 per cent.

Figures show that businesses were less confident in the second quarter of 2011 than they were at the start of the year, with the FSB ‘Voice of Small Business’ Index tumbling by 6.4 points in the first quarter from +6.7 to +0.3.

As a consequence, the FSB has argued the case for the UK to copy other European governments and to reduce the level of VAT in sensitive sectors such as construction and tourism.

Cutting VAT to just 5 per cent in these areas would help to fuel economic growth, the FSB maintained.

The survey took in the views of 1,600 small firms across the UK and revealed that confidence dipped in 13 of the 18 sectors monitored by the index.

The FSB expressed worries that optimism among hotels, restaurants and bars fell by nine points from +13 to +4 in the first quarter, while construction only managed to register an increase of one point to +3 in the second quarter.

The use of targeted VAT cuts in construction and tourism, the FSB asserted, would encourage a drive in job creation and consumer spending.

Evidence from other EU countries has demonstrated that any revenues lost to the public purse through VAT cuts are offset by earnings from additional demand, new jobs and the wider economic activity. 

John Walker, the FSB’s national chairman, said: “In an economy characterised by high unemployment and muted demand, more needs to be done to encourage businesses to take on staff and grow their business so that the recovery can really get back on track. 

“Since the start of 2010, the FSB Index has proved to be a good barometer of the path that economic growth will take, so the news that it has fallen back to almost zero paints a very worrying picture for GDP.   

“We now need the Government’s actions to match its rhetoric, and it must finally deliver on actions in its growth strategy. We must see a cut in VAT to five per cent in the construction and tourism sectors to boost consumer demand. It is tangible measures like this that will actually help small businesses to be able to grow their businesses and grow the economy.”

However, a Treasury spokesperson countered by saying that the advantages gained by specific business sectors would completely fail to balance the overall adverse effects of any large-scale reduction in the VAT take.

The Treasury commented: “Reduced VAT rates of the kind suggested would make a significant impact on revenue.

“Any claim that a boost to foreign tourism or construction would outweigh these effects would need to be looked at very carefully indeed.”

The VAT rise from 17.5 per cent to 20 per cent forms a key pillar in the Government’s efforts to reduce the budget deficit.

The new level of tax is expected to generate an extra £12 billion for the Treasury this year.