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Calls for UK to copy Germany with VAT cut and stimulus

Merkel - JOHN MACDOUGALL/AFP
Merkel - JOHN MACDOUGALL/AFP

Britain has been urged to follow Germany’s lead after it unveiled plans to slash VAT as part of a massive stimulus package to escape the coronavirus recession.

Angela Merkel has launched a €130bn (£117bn) rescue programme  that includes a temporary cut in VAT from 19pc to 16pc, as well as €50bn for rail and broadband networks and electric car subsidies.

Boris Johnson’s former economic adviser Gerard Lyons proposed a similar tax cut, arguing it will boost growth and is affordable because the Government can keep borrowing at record-low interest rates.

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In a paper published by the Policy Exchange think tank, Mr Lyons said: “To help the economy in the near-term, not only should tax increases be ruled out, but there should be cuts in VAT and in stamp duty on house purchases.

“The key issue is to take advantage of the new paradigm of low rates and low yields, and low debt servicing costs.”

UK total virus support cost May 27
UK total virus support cost May 27

It comes after former Chancellors including Alistair Darling said VAT could be cut again as it was in the financial crisis. A reduction in the tax typically turbocharges consumer spending by reducing costs at the tills.

George Bull of accountant RSM UK said that Chancellor Rishi Sunak could be tempted as the tax cut might boost the economy, particularly if it is time limited so households know that prices will rise again in future.

He said: “Any reduction will have to be significant if it is to boost demand. A time-limited cut to 15pc might do the trick.

“The German VAT reduction comes into force on 1 July so Mr Sunak may have a week or two to observe the German experience before he finalises his decision for the UK.”

Extra spending could have a dual benefit, Mr Bull said. He added: “It would be a smart move if fiscal stimulus also achieved climate change commitments.

"The German proposals include measures which will stimulate the demand for electric cars and reduce the consumer costs of electricity generated from renewable sources. These measures would find a ready welcome among the British public.”

Economist Kallum Pickering at Berenberg Bank warned that households are already saving heavily, in part because there are limited opportunities to spend and in part because they are concerned about losing their jobs.

As a result it might be more useful to copy the German spending plans rather than trying to encourage thrifty families to change tack.

He said: “If you want to generate recovery and you are willing to do it in a debt financed way, you get much more bang for buck if you just spend the money.

“The spending element, the UK can take a lesson from.”

Ms Merkel’s plan is bigger than economists had expected, raising hopes it will give a powerful boost to Europe’s largest economy as it moves from lockdown mode back into growth.

Mercedes - Wolfram Schroll /Bloomberg
Mercedes - Wolfram Schroll /Bloomberg

Households will also get a handout of €300 per child, while businesses’ social security contributions will be capped to reduce the costs of keeping workers on the payroll.

A €50bn investment programme aims to decarbonise the economy, boosting rail and broadband networks. It will double the subsidy for buyers of electric vehicles from €3,000 to €6,000.

Economist Karsten Brzeski, of ING, said: “It is not only the size of the packages which is remarkable but also the fact that the German government has made a complete u-turn in its approach to fiscal policy.

“This is not only the case for Germany but also for Europe. From austerity champion to big spender - a few months months ago, concluding with such a comment on German fiscal policy would have been almost unthinkable.”