| 1.1°C Belfast

Calls for tax cut as economy 'flatlines'

Labour called for an emergency cut in VAT to kick-start economic recovery yesterday as a slump in retail sales added to the bleak picture of the nation's finances.

Shadow chancellor Ed Balls said a temporary reversal of this year's hike in the sales tax would stimulate consumer confidence, counter inflation and help create jobs.

He urged George Osborne to end the "political gamble" of severe austerity measures but was accused by the Coalition of treating voters as "daft" by proposing an unfunded tax cut.

Prime Minister David Cameron and Nick Clegg both defended the Government's deficit-reduction strategy against Opposition demands for a "plan B" - suggesting that could only stand for "bankrupt".

And Mr Clegg said Labour was now "perilously close to terminally and permanently losing the confidence of the British people on the economy".

Mr Balls, making his first major speech on the economy since taking on the brief in January, seized on figures showing a surprise 1.4% monthly drop in sales volumes across the retail sector.

Food stores slumped more than 3% over the last year, the Office for National Statistics said.

VAT was raised from 17.5% to 20% at the start of the year as part of Mr Osborne's bid to accelerate the pace of deficit-reduction measures.

But Mr Balls called for a repeat of the temporary reduction imposed by Labour in 2008 which he said had proved very effective in the face of Tory opposition.

Pressed on the cost, Mr Balls said that returning to the 17.5% rate for one year would lose the Treasury around £13 billion.

"The question is not the cost to George Osborne of paying for this temporary emergency tax cut, but the price our country will pay if he carries on regardless," he said.

"Slowing down the pace of deficit reduction with a temporary VAT cut now would give the flat-lining economy the jump-start it so urgently needs, boost jobs and be a better way to get the deficit down for the long term.

"He (Osborne) can reverse it from 20% to 17.5% immediately and it has an immediate impact on people's purchasing power and the bottom line of businesses."

Mr Balls drew a parallel between Mr Osborne's refusal to produce a "Plan B" with the ill-fated decision by the Conservatives to enter the European Exchange Rate Mechanism (ERM) in the 1990s.

"George Osborne risks joining the ranks of chancellors, finance ministers and economists who should have known better, but allowed political imperatives to trump economic realities," he said.

Mr Cameron hit back, saying slashing taxes or boosting spending in the circumstances would be "making the problem of your deficit, your overdraft, worse".