According to newspaper reports, the government intends to cut the VAT rate from 17.5% to 15% for 2 years.
The assumption seems to be that, if the tax on consumption and services is cut, the prices will come down, we the consumers will purchase more and it will revive the economy. I remain sceptical about this measure as a tool of major stimulus.
Even if things are about 2.13% cheaper becuase of the cut in the VAT rate from 17.5% to 15% (my late-night calculations may be wrong here), would it be a sufficient inducement for people to buy things that they would not have otherwise bought? Should people buy things they don’t need or particularly want? 2.13% is not the greatest bargain you can find at the moment: shops are slashing their prices already, screaming 30% off! 50% off! 70% off! Would it make sense for those with debt, no cash at hand or living in fear of losing their jobs to go forth and spend, spend, spend? It’s not as if you have extra money in your pocket when the tax is cut, but you will have more change in your pocket after shopping, and if you don’t want to or cannot afford to shop in the first place, a VAT rate of 15% instead of 17.5% or a fall of 2.13% on the price tag is somewhat meaningless. Individually we’d be better off saving any money we come to thanks to Mr Darling and Mr Brown: but the economy will suffer even more if we were to do so. So my self-interest dictates that I hope this measure works and enough people will spend more money (though bankruptcy and/or family break-ups may be the consequences for those who spend), so that the economy revivies, while I save up my pennies for a better day.
Update: 24 November 2008
Mr Darling has announed the reduction in the VAT rate from 17.5% to 15% as reported. I’m still not convinced that it will work. The UK is now in a debt binge: £118 billion next financial year. This is a scary number. It also remains to be seen if the Chancellor’s figures stand up to scrutiny. Difficult days ahead.