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Conference Countdown 2015: Cutting VAT for tourism would be a costly mistake

September 2, 2015 11:06 AM
By Adam Corlett in Liberal Democrat Voice
Originally published by East Midlands Liberal Democrats

In the run-up to Autumn Conference in Bournemouth, we'll be looking ahead to examine the highlights in the debating hall, the fringe and training rooms. You can find the papers here. You can find all the posts in the series here.

One of the motions at conference is for reducing VAT on tourism as far as possible. Here's why that's a bad idea.

The idea is to reduce VAT on hotels and selected attractions from the standard rate of 20% to 5% - the minimum allowed by the EU. This is something the British Hospitality Association has been lobbying the Treasury on for years. The motion refers to the importance of tourism more generally, with figures that include all restaurants, pubs and outbound flights, amongst other things, but I assume its VAT proposal is (mercifully) more limited.

The government's response to this lobbying (under both Labour and the Coalition of which we were a part) has been to point to the substantial price tag. The cost of cutting VAT for accommodation alone would be £2 billion a year, with amusement parks and similar adding another £200 million. This is serious money. A comparable total would be the cost of the Pupil Premium that Lib Dems fought so hard to introduce.

Of course, the motion claims the tax cut could eventually be revenue-neutral, and they have the industry-commissioned report to prove it. But the Treasury is not short of submissions from people claiming their tax cut or spending increase will "pay for itself". The Exchequer Secretary last year told Parliament - not for the first time - that "a VAT cut would not produce sufficient economic growth to outweigh the revenue shortfall. I have not seen any new evidence since then that has led me to revisit that conclusion".

My opposition to this motion is part of a more general worry, that the party and its conferences will slide into the path of easy opposition, forever promising lower taxes and free ponies for all. Perhaps we might win a few votes each time we campaign for a new giveaway, but it can just as easily damage perceptions of our honesty and economic competence and shelter us from the difficult trade-offs that are a part of worthwhile politics. It was only four months ago that we campaigned for substantial tax increases and spending cuts, and there are several years of tightening to come.

In this case, the tax cut seems particularly perverse. Firstly, the intention is not to boost global prosperity (as some pro-growth tax cuts can), it is instead simply to tempt people away from other European countries and to spend in this one instead. C'est la vie, perhaps, but I'd like to think an internationalist party can find better solutions than a beggar-thy-neighbour race to the bottom. And how responsive are people to these prices anyway? Do Brits really lament that high UK prices force them to holiday abroad? The UK is indeed near the bottom of the global 'price competitiveness' index, but so are all European countries, regardless of VAT treatment, simply because they are rich, high income countries. Despite this, the UK is ranked 5th in the global Travel & Tourism Competitiveness Index that the motion refers to.

Secondly, the people who benefit the most are of course the richest - both visitors from abroad and domestic users of hotels, who (despite all the talk of international attractiveness) I'd guess are the majority here. And the more expensive the hotel, the bigger the tax cut. Or, the richer the area, the bigger the tax cut: London apparently accounts for 54% of the UK's inbound tourism spending.

The UK already has "one of the world's narrowest VAT bases", and liberals should set a very high bar when considering favouring particular forms of expenditure. In this case, we are being asked to favour those who use (or own) hotels at the expense of those who don't, and what is probably the UK's lowest skill industry at the expense of all others. Despite the arguments made by the hospitality industry, this is an unfunded, unprincipled and unfair tax cut. Please vote against it.

* Adam Corlett is an economic analyst and Lib Dem member

Read more by Adam Corlett or more about autumn conference 2016, conference countdown, tourism or vat.