Cut VAT to Boost Embattled U.K. Economy, Darling Says

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Former Labour Chancellor Alistair Darling has a recommendation for Boris Johnson’s government: Cut value-added tax.

Slashing the levy on sales -- a strategy pursued by Darling during the 2008 financial crisis -- should be considered to boost consumer spending, even as government debt balloons, he said in a report published by the Policy Exchange, a think tank. The paper was co-authored by Gerard Lyons, former economic adviser to Johnson.

The government should also let regional and local powers handle all infrastructure projects worth less than 500 million pounds ($618 million), the paper recommends, to fulfill the government’s pledge to “level up” the economy.

Cuts to VAT and employers’ national insurance contributions are among many measures being considered by the Treasury, according to a person familiar with the matter, who suggested that decisions haven’t yet been taken. Sunak will set out some modest stimulus measures next month, focusing on infrastructure and jobs, ahead of a full budget due in the fall.

Reviving growth and fulfilling the Conservatives’ pledge to tackle regional inequality will be a challenge. The economy shrank by a fifth in April, jobless claims have doubled to almost 3 million and the national debt is now above 100% of economic output for the first time since 1963 as the vast cost of government efforts to save jobs and livelihoods piles up.

What’s more, many Brexit-supporting regions that propelled Johnson into power are now being disproportionately hit by coronavirus and will bear the brunt of the economic fallout.

“The period after the last crash was one of extraordinary challenges and there was an urgent need to reduce the budget,” Darling said. “As the economy reels from an even more profound shock, the Covid-19 crisis, I sincerely hope that the government’s approach this time must be different.”

Record-low borrowing costs provide a favorable backdrop for the government to invest more. “Additional capital spending, in excess of the fiscal rules, would be sustainable and affordable,” the report says.

Separately, the government said Monday it would introduce new measures to help the construction industry get back to work this week, including an extension to planning permission deadlines and flexible hours to support social distancing.

©2020 Bloomberg L.P.

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