Cutting VAT might sound good, but what about the real world?

Everyone and anyone is this morning talking about how the Government will reduce VAT tomorrow to 15% from 17.5%. This was of course proposed by Ken Clarke earlier in the week. Crucially though this will only be temporary and will be clawed back at a cost of around £12.5 billion. However, I personally think that for those of us that live in the normal and real world this sort of tax cut is, like tinkering with tax credits, a bit of a con. According to the Telegraph, the cut "could save the average family as much as £10 a week." So that's "could" and "average", what a nice and neatly hedged claim that is.

You can guarantee that Darling will note this in his speech tomorrow as well, but here is the problem with it. What we're talking about in reality is a cut in VAT that, based on many assumptions, might, could, just, if everything is uniform and wonderful, save some people money. However, things like food are exempt anyway so a reduction won't impact there, and importantly that is where normal, ordinary people, are actually experiencing the effects of recession and price inflation more and more.

Just to illustrate the point, I have a little game I always play at the supermarket and have done so for many many years now. A till receipt will always tell you how many items you bought. I try and aim to buy more items than the whole figure amount spent in pounds. If I spent £50 and bought 51 items I've succeeded. This has though been virtually impossible to achieve for the past two years, even if you try and "shop smart" and go to Aldi, Lidl and other shops that some might consider a bit "pikey".

Of course, I doubt very much whether Alistair Darling, Gordon Brown, or many other Cabinet Ministers have ever had to shop in this way, or for that matter do much of their own shopping anymore. This is one of the problem with politicians sitting in their ivory towers, especially those like Brown with his tractor statistics that inform you the world is great whilst on the ground you know he's talking bullshit.

The calculated saving therefore that an "average" family "could" get are nothing more than hypothetical assumptions that people will see a plasma screen reduced by £200 and think, "oh what the hell!" It's fantasy land economics for the vast majority of people that are really feeling the pinch because they don't have the expendable income to piss up the wall on VAT'd products anyway.

However, even if we took at face value the claim that the average family would save £10 per week, lets stretch that out to a year. If we assume by average they mean, two working adults and two kids (kids clothes are exempt from VAT too remember), then we're talking about a saving of £1040 per year at a cost of £12.5 billion which is hoped to be paid for no doubt by more people spending on VAT'd products thus increasing the receipts even though the tax has been cut.

As I said yesterday though, how about paying that £12.5 billion by scrapping the ID card project alone, which is not popular, and increasing the tax free threshold by £1000? That would be double the "saving" for an average family than the VAT cut "might" create, and it would be very real. You'd be putting money in people's pockets to spend as well, not just theorising that because some things are cheaper by 2.5% that people will suddenly throw caution to wind and splash out.

There is something else we should remember. Just last week the Chancellor acknowledged that people were "tightening their belts". Does he really think that because he's going to make the cost of non-essential - and in some cases luxury - items, we're all going to loosen the belts and go on some retail therapy goodness? How is that going to happen if people don't see more money in their pockets?

This is a crucial point I think in the so-called "real economy". People will not see a VAT cut and think "yay! I can but that new blu-ray machine I've always wanted now". If you want to get people to spend then you have to let them have more in their pockets. It is the Net figure on our pay-packets that we look at each month, not the possibility that fancy items we might not need but really want are going to be a couple of quid cheaper.

Cutting VAT is not so much a con as a sleight of hand to draw attention to the words "tax" and "cut" and the inevitable impact that will have on the headline. Last week Cameron said, quite rightly, that a "tax cut is for life, not just for Christmas" and a cut in VAT is at best only going to see a massive impact in what we spend in the next month or so.

Don't get me wrong here, I'm not saying that a cut in VAT is in itself a bad thing. The problem is that the cut, given it is a "temporary measure", is clearly being used as a ploy to create a "tax cutting" narrative around Brown much like he did with his 2p cut in the rate of income tax which was transparently a tax rise in reality from the start.

The Sunday papers have clearly all been trailed the big spin for tomorrow and they've bought it hook line and sinker without actually thinking about it very much. They've bought the line that this will represent a saving for the average and no doubt "hard working" family, and not one of them have said "assuming the average family goes out and decides to spend large on VAT'd products at the expense of raising food prices that will not be effected by the cut".

This is not to say that they won't catch up after the fact on Monday and start to pick apart the detail that has not been trailed to them by Downing Street. You know, the stuff at the back of the report which says things like "a freeze in the increase of the tax threshold for 40% earners" that sort of thing.

Cameron and Osborne have a big fight on their hands tomorrow in their response to the report if they don't get people to delve into the detail whilst the Chancellor issues his statement. When the 2p tax cut happened Cameron missed a trick in not leaping on it straight away even though analysts outside spotted the con instantly with dirty maths on the packet of a fag packet. They need to drill home that a cut in VAT might well help the situation, but to frame it as a benefit for the ordinary everyday geezer is disingenuous hypothetical bollocks.

This is classic triangulation by Brown, because it seeks to make the Tories oppose a tax cut, and attempts to make him look like a financial genius. They need to hammer home that every year when Brown was Chancellor his predictions were wrong and that svengali attempts to create the perception of tax cutting for those of that live in the real world are just cynical manipulations of what Peter Oborne called the "client media".