VAT hike plan hits the rocks

THE government’s plan to raise VAT has hit an embarrassing snag after it was rejected by the National Assembly’s finance commission.

The commission was examining the last amendments to a bill “rectifying” the 2012 budget, before the bill goes to parliament. Due to absences – there was a majority of Opposition MPs present, rather than ones from the ruling UMP.

The commission adopted a Socialist amendment striking out the “social VAT” plan, which is meant to raise the basic rate of VAT from 19.6% to 21.2% on October 1.

In fact the majority will be able to reinsert it at a later stage, however according to the Socialist leader in the assembly Jean-Marc Ayrault, the fact it happened “reveals a malaise” among those on the right.

“They already know Sarkozy’s record is catastrophic and they are going to go back to their constituencies with a VAT increase that will hit purchasing power and halt growth. I understand why they’re not enthusiastic about that,” he said.

“We, on the other hand, were in strong numbers because we’re very mobilised against it.”

His UMP counterpart, Christian Jacob, however claimed it was a “trick”, and that the Socialists had temporarily appointed some MPs to the commission who do not usually sit on it.

The government insists on the importance of its plan, which involves raising the tax so as to lighten employers’ social charges. Prime Minister François Fillon said this week it was “necessary to lessen our [employment] costs compared to our competitors in the eurozone.”

The Finance Ministry estimates it will create 100,000 jobs.

Answering claims that the rise will affect low-income families the most, the ministry put out a statement pointing to the fact that many daily purchases attract no VAT (medical and financial services, rents…) or a reduced rate which is not affected by the plan (food, transport, newspapers…).

In fact, the ministry added, purchases of things affected by full VAT represent a slightly higher proportion of the outgoings of rich families compared to the less well-off, therefore “it is not correct to say the increase weighs more heavily on the poorest.”

Photo: David Monniaux