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Does George Osborne have a point about pasties? Yes and no

Category : Business

Let’s face it – the chancellor is logically correct that pasties are ‘hot food’ just like kebabs, and therefore subject to VAT. But politically, a pasty tax is still bad policy

As the pasty tax protest rolls up at the gates of 10 Downing Street, it is time to say that the chancellor is right – and wrong at the same time.

It is fair to describe pasties as hot food and therefore subject to VAT. In almost all shops they are served hot because consumers wouldn’t want them any other way. They are cooked in small batches to make sure they don’t hang around on the shop counter for long.

Why, George Osborne rightly asks, should his local kebab shop owner be forced to charge 20% on a doner while the Greggs next door gets away with selling a VAT-free sausage roll just because the meat is wrapped in pastry and not pitta bread?

Stephen Gilbert, the Lib Dem MP for St Austell & Newquay, makes the spurious point that it is “simply wrong for the government to impose a tax on the humble Cornish pasty while luxurious caviar remains tax-free”. But we are talking about cooked food, offered hot to the consumer.

Nigel Lawson was explicit in the 1980s, when he applied VAT to hot food, that pasties should be exempt. But he failed to provide a rationale for why such baked goods should escape tax. Maybe, unlike Osborne, he liked a quiet pasty supper while reading his red boxes in No 11.

But was George’s VAT hike, however limited, a sensible policy? When ordinary families are struggling against inflation at 3.5% and wage rises limited to 1.1%, the last thing they need is the cost of their lunch to jump in price. Undoubtedly, pasties and sausage rolls are eaten by lower income groups more than Osborne’s circle of friends (David Cameron excepted, of course). And where there is a price rise, there are jobs at risk – and plenty of pasty makers are family-run firms in Britain’s depressed regions that need all the support they can get.

Gilbert says 400 jobs in his constituency are at risk, as is £7.5m to the Cornish economy, which is not the result Britain needs at the moment when unemployment stands at 2.65 million and youth unemployment above 1 million.

The wider point is that the government needs to adjust its income away from taxes on work to taxes on consumption and wealth. There are many consequences of such a shift in tax policy, but the main one would be to increase incomes from work – which would make pasties, even with VAT, affordable for everyone.