Sunday, November 23, 2008

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".


haddock said...

Any cut in VAT will be courtesy of our masters in Brussels not Slash Gordon.... I doubt if this will be made clear in parliament.

Barnacle Bill said...

Dizzy, I have argued it another way that really it is a cut that benefits the better off in society with out really helping those lower down in the order of things.
However I do agree with you fully on the way you have argued the case. It is just another of our glorious unelected Leader's smoke & mirrors trickery, there is NuLabor political spin with a capital P all over it.
I fear that like the 10p tax fiasco in a few months time people will wake up to the reality behind this con job.
Unfortunately by then OGUL will have become our glorious elected Leader.

Stu said...

it isn't the cut that matters, it's when they raise it again. They're not saying people will suddenly rush out and buy blu-ray players, they're saying that the 2 or 3 months before the VAT goes back up again people will want to take the opportunity to spend while things are cheaper.

It might be better to put money into people's pockets, but then they might just spend it paying off their debts and then you haven't helped the economy at all.

A combinational approach is required, which is what the Tories seem to be going for.

Anonymous said...

haddock said...
Any cut in VAT will be courtesy of our masters in Brussels not Slash Gordon.... I doubt if this will be made clear in parliament.

23-Nov-2008 09:52:00

As I recall, the minimum level of VAT in the EU is 15%, so this idea des not need any authorisation from Brussels. Still a shit idea though - it's a short term cut in indirect taxation at a time when people are cutting back on expenditure due to the uncertainty that now surrounds them. It won't work and the pain to come will just exacerbate the problem.

Old BE said...

Spot on Dizzy. A reduction in VAT will only benefit those not already struggling. Those already struggling will have reduced their non-essential spending to zero already.

Secondly, the cost to retailers of changing all their prices will be phenomenal. The admin burden and practical burden of changing labels etc. will be huge. If retailers think the change will be temporary they might keep the prices the same and pocket the difference.

If we are to have unfunded tax cuts they should go to small businesses to dissuade them from laying off staff and to income tax cuts (or thresholds) to help people who are financially on the edge, not to encourage yet more unsustainable spending.

Anonymous said...

My energy bills have just gone up again, 2 1/2% off VAT will not reduce them to the earlier level.So I shall hardly be going on a spending splurge.All this rubbish about Brown's genius economics raises the question what actual benifit have I received.How many people have been saved from repossesion?it appears Northern Rock is a leader in the repossesion stakes and thats Brown's bank.How many jobs has he saved?none that I can see.Has His bank bailout worked? Well it appears N.R. has lost taxpayers 3 billion and the other banks do not seem to be moving as the bailout terms are too onerous.So why is he constantly bigged up in the MSM as the saviour of the universe,to me he looks the worst PM in living memory and I can remember back to Attlee.

Anonymous said...

I used to work in retail and when VAT went up to 17.5% the two weeks leading up to the hike was like a mini-xmas for the retailer as people rushed to save a fiver or two.

The mentality was less how much cash they saved than "not giving it to the taxman", although under Labour the public seem increasingly keen to give more and more to the taxman.

Anyhow, I would be very interested if any retail sales figures are published which showed that this weekend, sales were down sharply as people wait a few days to see what will happen to VAT.

As the talk of a cut in stamp duty nearly killed of house sales for a month or so, the talk of a VAT cut might be having the same effect on retail sales right now.

Mark Thompson said...

I think this proposal if it turns out to be true will be an expensive damp squib for a number of reasons, including some of those listed in your post.

I have listed these in a separate post on my blog.

haddock said...

man on the street, I did read that the EU have discussed this in the last few days.... I suspect it is a EU initiative which will be rebranded as a Gordon initiative.

a couple of pence discount in too small to influence spending.... shops are having to give 40% or more to get peoples money off them. The essentials, food and energy for the home are at zero or low rate in any case.
I suspect a 10% rate will be wheeled out.
pity the poor shopkeeper who has to bear the cost of buggering about with all his price ticketing/book-keeping just to buy Gordon a few weeks/votes.

Anonymous said...

And watch VAT creep up towards the 19% mark once the govt start to increase it again to claw back all that lost revenue (and bring it inline with the rest of Europe)

Anonymous said...

The correct response would be add up everything that you "save" by not having to pay the additional 2.5%, and SAVE it somewhere.

Under the bed would be good, I guess.

And then tell the bastards that that's what you have done.

No inflationary bubble here, thank you.

Anonymous said...

Not only is there no VAT on food, children's clothes or public transport, the rate on energy bills is 5%, which will presumably not change. A VAT cut will make virtually no difference to the cost of essentials. On other things, I'd expect most shops to keep their prices the same and increase their margins, rather than passing a VAT cut on to consumers.

Also, whatever the Government might say, a drop in the VAT rate from 17.5% to 15% is not a 2.5% reduction in the total price of an item, it's 2.1%.

Anonymous said...

How much is it going to cost almost every business in the land to redo all the signage and paperwork with their prices on? And then to redo it again in a few months when the VAT goes back up? Not every business changes their prices daily anyway like a supermarket...

Anonymous said...

If the telegraph claims that a 2.5% cut in VAT (assuming it all gets passed on) will save us £10 a week, they expect us to be paying £400 a week on VATable stuff. One suspects the telegraph is talking through its backside once again.

Anonymous said...

"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 haven't done thinking for some time. I really don't understand why though. Are they wholly beholden to the Labour set? What does Many have on them? It's just... bizarre.

Perhaps they fear that a dose of reality would be too much for Gordon. He is coming across very, very strange in some interviews. Sudden grins. Wavy arms. It is repellent to see this man gurn with glee while we suffer misfortune. There is nothing behind it but a dour, scheming monster. He doesn't care about the poor. He doesn't care about the country. Politics is everything and thanks to Blair and his cronies Brown has become a bitter and very damaged man.

TotalBanker said...

Dizzy - I agree with the gist of what you're saying, but could I just point out that I don't think people should get too caught up with the 'price effect' of a VAT change. Regardless of whether cheaper prices affect marginal spending decisions, a reduction in VAT absolutely WILL save people money on the things they usually buy anyway. This extra cash can then be spent/saved/etc. in the same way as an income tax cut. Any additional price effect a VAT cut produces vs an income tax cut is just a bonus...

Anonymous said...

As far as I can see the only reason VAT is being cut is Ken Clarke suggested it earlier in the week.

Pointless as far as the economy is concerned and its clear the only purpose is to play politics.

Man in a Shed said...

Of course the items you mention with VAT are made overseas, so Gordon is just accelerating the transfer of money out of the country by this.

I wonder if a freedom of information request would give you the treasuries predictions of this effect.

Not a sheep said...

A reduction of VAT from 17.5% to 15% does not lead to a 2.5% reduction in price. An item priced at £100 + VAT would reduce in price from £117.50 to £115.00, a reduction of 2.13%.

Linda said...

It's just another grand gesture from a Government under fire out of touch with the people.