Anthony Browne: Let’s reduce obesity by charging VAT only on the unhealthiest foods

27 Jun

Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.

What is the difference between a gingerbread man with chocolate eyes, and a gingerbread man with chocolate feet? If you buy the one with chocolate eyes, you will pay no VAT, but if you buy the one with chocolate feet you have to pay VAT at 20 per cent.

How we have all laughed over the years at the crazy VAT system on food, which we had limited options to change when we were in the EU. Most food incurs no VAT – but some does, but the distinctions are often arbitrary.

In some of the most mocked court cases in history, judges have had to decide whether Jaffa cakes are biscuits or cakes (biscuits), whether a Pringle is a crisp (it is), and what a flapjack is. Why does Nesquick strawberry milk incur VAT but chocolate milk doesn’t? Why are Twiglets VAT free when Walker’s crisps aren’t?

There are other bizarre anomalies with VAT on food and drink, with healthier items taxed more heavily than less healthy ones. Mineral water, frozen yogurt, vitamins and muesli bars all incur VAT at 20 per cent and yet bourbon biscuits and chocolate chip cookies are VAT free (chocolate-coated biscuits do have VAT).

Earlier this month, the Government’s food strategy was attacked by health campaigners for dropping plans for a “sugar tax” as part of the fight against obesity. With the cost of living crisis raging, it is clearly not a good time to introduce a new tax on food, or scrap “buy one get one free” deals. Campaigners said it left the obesity strategy in tatters.

But there is a simple solution: reform the VAT system on food so that only the unhealthiest foods, whose consumption increases obesity, attract VAT. We don’t need a new tax system on food, but instead to reform the one we already have to make it more rational, and indeed simpler. It would help ensure the healthy option becomes the cheapest option, and give a huge incentive to food companies to reformulate to reduce sugar and fat content.

The Soft Drinks Industry Levy has shown how powerful aligning tax incentives with health objectives can be. Eight of the top 10 drinks companies reduced sugar content of their drinks by 15 per cent or more. Research from other countries shows a similar pricing effect: in the Netherlands, a 25 per cent discount on fruit and vegetables led to a 25 per cent increase in purchases of them.

Often this issue ignites angry debates about the role of the “nanny state”. But reform of VAT on food will not lead to any new nannying, but rather make the existing nanny more rational.

The basis of the current VAT system on food was laid down by the then Conservative chancellor, Selwyn Lloyd, in his 1962 budget, where tax was imposed on certainly unhealthy products such as sweets and ice cream, but most food was tax free. It as blunt, revised a few times, but when we joined the EU, our purchase tax was transformed into VAT, and we lost most of the flexibility to change it. Calls for a more rational system over the years have been blunted by the Government’s powerlessness.

The magisterial Mirrlees Review of tax in 2010 for the Institute for Fiscal Studies cautioned against reform of VAT on food because of the complications of EU membership. This is clearly no longer an issue. We have indeed a Brexit opportunity.

The arguments for aligning VAT on food and drink with health objectives are powerful, but what are the reasons for hesitation?

The first can be summed up in one word: “pasty”. The attempt in 2012 by George Osborne to impose VAT on pasties – the pasty tax – lead to such a heated row (pastygate) that he was forced to back track. The Government now will fear a repeat if it increases any VAT on any food, however unhealthy.

But the cases are totally different. The HMT raid on pasties was an attack on an iconic much love food for arcane justifications that were impenetrable even to tax experts, and it had absolutely no support from anyone else. Not even Government MPs could justify something they couldn’t understand.

By contrast, aligning VAT on food with health objectives to tackle the obesity crisis is a clear justification with massive external support. The ridiculousness of the current system and the obesity crisis are both well known reasons for reform. Health campaigners and food campaigners will strongly support it, and could be mobilised. It would be easy for ministers and MPs to explain in TV studios why it is being done.

It is also different from pastygate for two other reasons. First, Pastygate was essentially an attack on pasties to raise revenue. But reform of VAT on food and drink could be largely revenue neutral – as well as VAT going up on unhealthy items, it would be cut on healthy ones. VAT on muesli bars and low sugar cakes, as well as vitamin supplements, could be reduced. Reform can be presented as a package – cuts on VAT on healthier foods, in return for rises on seriously unhealthy food.

Second, manufacturers can escape rises by reformulating their foods to make them healthier, just as they reduced the sugar content in fizzy drinks to escape the sugar levy. If they complain about a new tax on their products, there is an easy political retort: just reduce the fat and sugar content.

Chocolate-covered biscuits could go from having VAT at 20 per cent as they currently do to VAT free if they just reformulate. A system could be devised with an interim rate of VAT, such as 10 per cent or 15 per cent, to make it easier for food companies to cut tax by reformulating.

Or you might end up with two versions of the same product: for example, full sugar Alpen (in the red packets) might incur VAT, but low sugar Alpen (in the blue packets) might be tax free. In the current system, food manufacturers have no incentive to cut sugar and fat content. That needs to change.

The second biggest cause for Government hesitation is defining what is healthy and what isn’t. Clearly this is complex, and disputed territory.

But we do have a Food Standards Agency which produces a traffic light system for food – red, amber and green depending on health status, such as sugar and fat content. The Government could require all red rated foods to have VAT at 20 per cent. If the Treasury doesn’t trust the FSA to have any input into tax policy, it could produce a simpler system, such as just imposing VAT on foods with sugar or fat content above a certain threshold (eg any food with either sugar or fat above a certain percentage incurs 20 per cent VAT). There would be no need for court cases to decide the legal definition of a biscuit.

The more I and my research team have looked into this issue, the more I have become convinced of the arguments. Clearly it is a massive and sensitive reform, and the Government would need to start with a consultation, followed by a Green Paper. Industry needs to be consulted, but I am sure can be brought on side. To help tackle obesity, to improve respect for the tax system, and to take advantage of Brexit, it is something the Government should do. We don’t need a new sugar tax: we just need to make the existing VAT system work as intended. Anyone for a VAT-free cereal bar?

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Sam Robinson: To create a fairer society, the Government must reform taxes on wealth

2 Feb

Sam Robinson is a Senior Researcher at Bright Blue. Bright Blue’s new report, ‘Home truths: options for reforming residential property taxes in England’, is available here.

This has been a turbulent time for the Government. Months of negative headlines, which have reached a furious crescendo this week, have drained authority and distracted from the task of governing.

The Government will no doubt be hoping for a reset that can turn around its fortunes. But, even when the ‘partygate’ allegations finally abate, there are significant headwinds ahead.

In the short term, the Omicron variant will have no doubt dampened the nascent economic recovery, even while rampant inflation is fuelling a cost-of-living crisis. In the longer term, action is needed to repair the public finances after unprecedented public spending during the pandemic, and to deliver on the Government’s central mission of ‘levelling up’.

Tax policy has a central role to play in addressing all of this. Indeed, the Government has begun the task of restoring the public finances by introducing several big revenue-raisers such as the Health and Social Care (HSC) Levy from April this year. The HSC Levy, however, has continued a trend of shunting the tax burden onto young workers and increasing the already stark differences in the way the tax system treats different sources of income.

While the need to raise revenue cannot be ignored, there is a better way forward on tax reform. A centre-right Government that is committed not only to stabilising the economy but also to ‘levelling up’ the UK in the long term should rebalance the tax system from income associated with work and effort and onto income associated with privilege and luck.

First, lowering taxes on work. The HSC Levy will not be abolished, as some Conservative MPs have been pushing for, but it can be improved. The priority should be significantly lowering the rate of the employer element of the HSC Levy, accompanied by broadening the scope of the levy to apply to pensions and rental income.

Not only would this spread the impact of the levy more fairly, but it would have beneficial economic effects. Indeed, if the state of the public finances allow, Government could go further and also cut Employers’ National Insurance more generally.

In the short term, all this would support businesses by lowering the cost of their payroll at a time when there is significant upward pressure on wages. In the longer term, lowering taxes on employers is likely to feed through into either: higher real wages – especially crucial now that wages have dipped back below 2008 levels; more employment; more profitable businesses; or, a combination of these effects.

This could further aid the economic recovery after the pandemic subsides. But it will also help to pave the way for the high-wage, high-productivity economy that this Government originally set out to create.

To partly offset the net reduction in taxes from work, the Government should look to reform taxes on wealth – chiefly, Capital Gains Tax (CGT) and Inheritance Tax (IHT).

Wealth in the UK is relatively undertaxed: as household wealth has risen from 300 per cent of GDP to around 700 per cent today, the main wealth taxes – including CGT and IHT – have failed to keep pace.

But reforming the way we tax wealth is about more than just a missed revenue opportunity. It is also about fairness. Raising the basic rates of CGT to 18 per cent and 28 per cent, while removing Business Asset Disposal Relief, would reduce the large discrepancy in effective tax rates between income from work and income from assets.

Though we ought to tax capital gains more heavily, it is also vital that it is taxed more fairly. It is time we stopped taxing ‘paper gains’ arising only due to inflation, especially in the current economic climate, by reintroducing inflation indexation. And if we are taxing the upside of investment more then we should cushion against capital losses better, by allowing capital losses to be offset against income for wider range of assets and over a wider period.

Reforms to Inheritance Tax are also a powerful way of supporting the becalmed ‘levelling up’ agenda in the long term. The IFS recently found that the role of inheritance in social mobility is increasing, with real impacts on the life outcomes on today’s young people: among those born in the 1980s, inheritances are predicted to increase lifetime incomes by five per cent on average for the bottom fifth of the wealth distribution, and by 29 per cent for those whose parents are in the top fifth.

Compounding this problem, IHT in its current incarnation is horribly designed. The arbitrary ‘seven-year rule’ means that those who pass on assets well before death face no tax. Reliefs intended to help family businesses are woefully targeted: Business Property Relief applies not just to shares in a family business but can also apply to the value of shares in companies with no family connection. Little wonder that the very wealthiest estates end up facing a lower effective tax rate than other more modest estates.

Moving to a Lifetime Receipts Tax (LRT) with a starting allowance of £125,700, with headline rates mirroring the Income Tax schedule and thresholds set at ten times Income Tax thresholds, would end the arbitrary distinction currently made between the timing of gifts. And it would reduce the ability of the wealthiest estates to minimise effective tax liabilities, ensuring inheritances are taxed more progressively.

To do what we propose around work and wealth taxation, there will be difficult and potentially unpopular decisions along the way. But the reward would be a tax system that can, in the short term, help to boost post-Covid economic growth; and, in the long term, lay the foundations for a more equitable tax system and a more meritocratic society.

David Gauke: Sunak’s options for a Budget windfall. Lower debt, tax cuts and higher spending. Which will he choose?

27 Sep

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

In a month’s time, Rishi Sunak will have some good news to deliver in his Budget. He will have more money to play with than was forecast at the time of the last as forecast by the Office for Budget Responsibility. How he uses these additional resources will tell us a great deal about his priorities and the priorities of the Government.

Before turning to his options, it is worth setting out some context. The overall state of the public finances cannot be described as being particularly cheery, even if they are significantly improved since March.

The debt to GDP ratio will still be nearly 100 per cent, higher than at any point since the early 1960s, and not forecast to fall fast. The Government still has substantial spending pressures in the short and medium term – Covid catch-up, levelling up, net zero and social care – as well as long term demographic pressures that will bite in the 2030s. In response, the Government has this year announced substantial tax increases with the Corporation Tax rise, a freeze on thresholds and allowances in the personal tax system and the National Insurance increase announced earlier in the month. We now have the highest tax burden in our peacetime history.

The tax rises have not taken effect yet, but many people are already facing a squeeze in living standards. Inflation is set to hit four per cent, with energy prices rising much faster than that and six million people are about to see the end of the £20 per week Universal Credit uplift.

So at a time of high debt, high taxes, falling living standards and unfunded spending commitments, a bit of good news does not come amiss.

The good news is that the OBR’s March assessments of GDP growth in 2021 (4 per cent) and of the long term scarring effect of Covid on the economy (or, to put it another away, the capacity for the UK economy to grow in future) of three per cent looks to be pessimistic. With GDP growth this year likely to be approximately seven per cent (although the current supply chain uncertainties may bring it down a little) and scarring as little as one per cent, the difference to the public finances could be low tens of billions – a very handy sum.

Assuming that this is the case, what are Rishi Sunak’s options?

First, he can strengthen the public finances by bringing debt down faster than originally planned. We are getting our debt away cheaply at the moment which, some argue, suggests that there is not an imperative to do make a further reduction. But our debt levels are uncomfortably high in the event of another recession, and even small increases in interest rates could result in us paying a lot more to service our debt. Maintaining market credibility is always important to the Treasury and, by all accounts, the Chancellor of the Exchequer. We can assume that he will be keen to ensure that a significant proportion of the improvement in the public finances is put to this purpose. It also means that the Government may have more choices available nearer the time of the general election.

Second, taxes could be cut. This seems very unlikely to be announced in October ,given that the Prime Minister has just announced some tax rises, there remain outstanding spending pressures and it is still relatively early in the electoral cycle. Many Conservative MPs are not happy with the historically high level of taxes, but that is not going to change any time soon.

Third, he could increase departmental spending. The Treasury is downplaying the chances of this option by stating that the spending envelope has been set and is not going to be re-opened, but I am somewhat sceptical that this is quite so hard and fast a position.

There are two conflicting views on the pressures on departmental spending. One view is that the current spending plans assume no Covid costs after 2021-22 which is unrealistic; that generous spending plans for health, education and defence mean that there is precious little left for other departments – to the extent that unprotected departments face a real terms reduction and, if you compare the departmental spending numbers with what was announced in March 2020, there has been a cut.

The alternative argument put forward by the Treasury spending hawks is to point out the extent to which March 2020 signalled a turning-on of the spending taps. The long term trend growth of our economy is forecast to be 1.5 per cent. If departmental spending is to remain constant as a share of GDP, it would also grow at 1.5 per cent but, instead, the plans involved increases of four per cent a year and the capital spending element by seveb per cent a year.

The Treasury gets very annoyed at any suggestion made by the good people at the Institute of Fiscal Studies that there are departmental ‘cuts’ because the current spending plans are lower than those announced in March 2020. It is reminiscent of the trick Gordon Brown used to pull of setting out steep increases in public spending and, when the Conservatives set out slightly shallower increases in spending but increases nonetheless, describing the differences in spending as ‘Tory cuts’.

The bigger point the Treasury will be making is that, for those departments that have much more to spend, they really should absorb the short-term Covid recovery costs because spending is going up fast enough as it is, thank you very much.

(And, by the way, given that we are giving you this extra money, how about some proper efficiency reforms in return? Spending reviews should be the moment when the Treasury and spending departments make some big strategic decisions as to how taxpayer value for money is achieved but, since the Prime Minister has just reshuffled many spending ministers and the Chief Secretary to the Treasury, such a development does not seem likely on this occasion.)

The real issue is the position with the unprotected departments. There is a political vulnerability if departments do, in fact, see real term cuts (“the return to austerity”). With regard to two departments of which I have experience, the Ministry of Justice clearly needs more resources to function effectively and, in terms of protecting the public finances, penny-pinching with HMRC is counter-productive. My guess is that, with the exception of overseas aid, the Chancellor at the very least will find the resources to ensure no department faces real term cuts.

The final choice is on welfare. The £20 per week Universal Credit uplift will have gone by the time we get to 27 October and, particularly at a time of rising prices, this is going to be painful for many. Lowering the taper rate will not help the poorest claimants, but it is consistent with the Government’s emphasis on incentivising work by essentially lowering the marginal tax rate. It would also provide a reasonably good answer to what the Government is doing to help people with the squeeze on living standards. Taken in the round, a reduction in the taper rate ticks so many boxes that I would be surprised if it does not happen.

So the Chancellor should have some positive announcements on borrowing, departmental spending and Universal Credit. In what may prove to be a difficult autumn for the Government, Sunak’s October Budget looks likely to be one of its better moments.

Jude D’Alesio: The Budget must be centred on young people

30 Aug

Jude D’Alesio, aged 19, is one of the youngest school governors in Britain, and is a Law student at the University of Bristol.

When I listen to my grandparents complain relentlessly about the lockdown, I cannot help but feel slightly frustrated. Frustrated, because I have sacrificed a term at university to go into lockdown to save them from this virus!

The government’s imposition of a lockdown in the UK was aimed at protecting those most vulnerable to contracting coronavirus, principally the elderly. There is no doubt that this was the correct decision, and Prof Neil Ferguson stated that lockdown should have been imposed earlier.

Over 95 per cent of coronavirus deaths have occurred in those older than 60, and 50 per cent of all deaths have occurred in those over 80 according to the WHO. It is only right, therefore, that we seek to protect the elderly, the most vulnerable in our society, from the disease, and the country is certainly united in this goal.

It is undeniable, however, that lockdown has taken a significant toll on the younger generation, of which I am a part. In higher education, lectures have gone digital, and some teaching missed altogether. This especially disadvantages final year students, many of whom will be embarking on their careers with significant gaps in their knowledge, particularly critical in professions like medicine.

There is also the immense damage caused to secondary and further education by the lockdown. At least a whole term of work missed will prove acute in those at crucial points in their education, namely GCSE’s and A levels.

Being robbed of the chance to outperform your predicted grades after months of hard work will deny many the chance to attend the best universities. This can only be negative, as we want our younger generations to receive the best education possible to enable them to pursue their ambitions.

Families with the lowest incomes will be hit hardest by the effects of distance learning; not being able to effectively participate in online classes due to a lack of technology will inevitably create skills gaps among the poorest in our society.

For all these reasons, the next Budget should be focused on, and most beneficial for, young people: their education, their skills, their opportunities.

In many ways, the pandemic has breathed fresh unity into our country as we are united in fighting the virus. It seems fair, therefore, that everyone should in some way bear the cost of the current recession. However, as the lockdown came at the cost of young people, there are undoubtedly changes benefiting young people which can be implemented in the next Budget.

Scrapping the triple lock is a great start. The triple lock, implemented by the Cameron government, increases pensions in accordance with the Retail Price Index, average earnings or 2.5per cent, whichever proves highest. This could enable savings of £8bn a year, according to a leaked Treasury document.

The current main rate of corporation tax, sitting at 19 per cent, has been stagnant since 2017. Such desperate times surely call for a cut in the rate, in line with the government’s aim to make us more competitive post-Brexit. Additionally, the government’s plan to merge the Foreign Office with DFID, whether the correct decision or not, will undoubtedly produce savings.

The proceeds of growth, merely the beginning of a range of reforms, should be reinvested heavily in young people’s education and opportunities to redress the balance caused by coronavirus. This must include the £1bn ‘catch-up’ plan to enable school children to bridge the gap left by lost teaching. However, amounting to only £80 per student (IFS), further funding once coronavirus passes should be on the cards.

This is, of course, only a starting point, and many more steps must be taken to alleviate the portentous educational, financial and social burdens which have overwhelmed my generation. But, there have been clear losers during this pandemic and the next Budget should recognise as such.