Plumbers dodging VAT aren't to blame for economic mess

Columnist

Wednesday 25 July 2012

So the plumber presents his bill.

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Ian Bell

He knows that you know that he knows. If you elect to give him folding money in exchange for his labours that leaking tap will have cost you much less than it might have done. To do otherwise and create a paper trail is not in his interest, nor in yours.

He probably won't cut the bill by the full amount of VAT due: for him, there would be no point. The chances are that he'll offer to split the difference. You will have broken no law and he will take his chances with the revenue.It goes on all the time. Upstanding folk sometimes object – this is tax evasion, after all – but the rest, in their millions, file it away in the capacious mental folder marked "rational self-interest". When times are hard, the rational choice is sometimes the only choice.That point seems to have been overlooked by David Gauke, the hitherto anonymous Exchequer Secretary to the Treasury. Fresh from promising to "name and shame" dodgy, if law-abiding, accountants, he lectures the rest of us on ethical hazards. Paying that plumber in cash, he says, is "morally wrong".So is it morally right to risk putting a hard-pressed tradesman out of business? Perhaps, given the prospect of a bill inflated by VAT, you might have tolerated that leaking tap. Instead, customer and plumber, you have between you generated some fabled "economic activity". The cash you paid will circulate. Some of it will be spent at a builders' merchant, some at a supermarket, some, no doubt, down the pub. Some might go to maintain the plumber's overdraft with the bank. Each of those enterprises could do with the cash, just at the moment. An Exchequer Secretary is supposed to know this sort of thing.A Tory is supposed to know a couple of other things. His philosophy in these matters is well-established. In the classical version, the problem in your transaction with the plumber is not the cash, but a VAT rate raised to 20% by a Tory Government, a rate the Government refuses to cut. Force the plumber to stick to the law and the customer might keep his wallet shut. A good Tory would say that the tax is the problem.George Osborne probably reckons himself a good Tory. He understands the theory perfectly well. As recently as March, in fact, he said the 50p income tax rate had to go because it was encouraging tax avoidance. So where does that leave our imaginary plumber? Doesn't it also render Mr Osborne "morally wrong".Taxes should be paid: there's a revolutionary idea. Tories live by the belief, however, that excessive taxation inhibits enterprise. Yet rather than argue for an immediate cut in VAT – because Labour would crow – Mr Gauke prefers to demonise anyone who connives with tradesmen. While his leaders rave about the big picture, he concentrates on a tiny piece of the jigsaw.It's not a pretty picture, in any case. Last week, David Cameron didn't bother to argue when an interviewer suggested that Britain's economic slump could continue until 2020. All talk of banishing the debt and the deficit before the next election has been forgotten. This raises a political point – so what is the Coalition for, exactly? – and a bigger question. What does Mr Osborne think he's doing?You needn't rely on me to ask. According to the left-wingers at the International Monetary Fund, Britain's recovery "has stalled". What's more, "Post-crisis repair and rebalancing of the UK economy is likely to be more prolonged than initially envisaged. Confidence is weak and uncertainty is high". The IMF recommends, as a matter of urgency, an increase in spending and investment if we are to avoid a "permanent loss of productive capacity".Today, GDP figures will be released. It is close to impossible to find anyone who believes that Britain has escaped a third quarter of economic contraction. The Coalition will blame the eurozone crisis, yet again, but yet again that will be only half the story. The IMF reckons that Mr Osborne's cuts alone have put a 2.5% hole in the country's income. As a consequence, his borrowing continues to grow: £14.4 billion in June compared with £13.1bn in the same month last year. So a brilliant plan is hatched: blame plumbers and their customers.Ask a couple of obvious questions. First, has every tradesman in the land changed his billing practices since last year, and somehow left Mr Osborne £1.3bn short, or has the VAT increase turned out to be suicidally counter-productive? Secondly, if the Chancellor's cuts have choked the economy to the point at which increased borrowing is needed, how is this "reducing the deficit"?Mr Gauke has been sent out as a decoy to spout big numbers in an attempt to repeat the old Coalition trick. This is the one that says we only have ourselves to blame, the one that pretends there is an equivalence between cash-in-hand to a plumber and Vodafone's ability to avoid paying corporation tax.But we know how this mess happened. Incorrigible Greece and Italy aside, the figures and dates are fascinating. In 2008, for example, Britain's debt was 44.4% of GDP. Ireland's equivalent figure was a mere 24.8% while mighty Germany stood at 67%. Spain, having run balanced budgets during the 21st century, had debts standing at 36.2% of GDP in 2008. And what happened in the autumn of that year? According to the Spanish government, its debt burden will be 80% of domestic product this year. Britain touched 85% in 2011; Ireland toiled with a figure of 108%. The story played out in different ways in different countries, but one factor was held in common. It wasn't plumbers dodging VAT. They don't run banks.Still, according to one who should know, no-one should imagine we would be better off "if we hang 20 bankers at the end of the street". He adds: "Don't take 30 years of liberalisation, beginning under Mrs Thatcher, and say this is what caused the financial crisis." That would never do. Tony Blair, adviser to JP Morgan, to Swiss financial firms and several governments, didn't start to earn £20 million a year by biting the hand that feeds.

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Plumbers dodging VAT aren't to blame for economic mess

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