24 November 2008

Is VAT it?

As I have said previously, I have grave doubts whether the VAT cut just announced will be passed on in lower prices and even if it was, I doubt most people would notice, yet alone credit Labour for it politically.

This 'deflationary measure in deflationary times' is...
puzzling economically AND politically - it certainly is not going to make people rush out to the 97.5p shop or vote Labour in a Spring election. When Brown says he has ruled out 2009, I now believe him-he has ruled it out inadvertantly, I don't think he meant to. This VAT measure is most definitely playing the long game - I think this 'pre-budget' increases the chances of a big Tory majority come 2010.

Saying that, in theory, cutting indirect taxation does help the poorest and this £13.5bn will be put into the economy somewhere, even if it mostly goes to retailers and businesses. Maybe this 2.5% VAT cut will keep alive some businesses and retailers on the margins and therefore save some jobs. It will definitely lessen the impact of the recession/depression more than the Tory policy of 'do nothing'. We all know how people suffered in the 80s and 90s under the Tories.

The other measures announced are little sums of help here and there that do not register much with the apolitical majority, a hundred or so for basic rate payers, sixty quid for pensioners, and a less steep £30 hit on vehicle excise duty (welcome that this green measure not completely abandoned).

Then we come to the 45p top-rate 'tax bombshell' that has so shocked the Tories and the Mail/Murdoch-led media. The problem is not that taxing those on £150k+ is unpopular - it isn't and even the Mail had to admit as much, the problem is the £2bn it raises is quite clearly nowhere near enough to match the £20bn-£100bn that needs to be clawed back to put us back to our current low levels of debt - a place that a careful Labour government has taken us to over the last 10 years.

When we think what could have been done with this £20bn this pre-budget is a big disappointment and an incredible waste of political opportunity for the Left - a £500 cheque to 22m basic rate taxpayers as Cruddas suggests or targeted to the lowest 6m earners a £3,000 cheque each - nobody could then accuse Labour of ignoring the poor with that sort of headline grabbing gesture - or of the change being inconsequential as the VAT change might be.

The Tories can now successfully argue that Labour will have to raise taxes on middle or low earners in the futur,e whereas a 50p tax on those over £100k would have made Labour's figures much closer to adding up.

At least we now have clear dividing lines for the next election - with the Tories effectively having to argue against tax increases on those earning over £150k - voters will now know where the Tory sympathies lie.

The bottom line is that recessions in capitalist systems serve a purpose - they are a much needed 'correction' to the over-spending of the past. The difference between a Labour government and a Tory one could well be that the Tories like to see the recession as painful and quick as possible on those at the bottom of the pile - whereas Labour wants to spread the pain thinly and more fairly. We shall see what the voters think in 2010.


  1. Neil, not you as well!

    Of course VAT cut won't be 'passed on', because it is not and never was a 'tax borne by the consumer'. VAT is a turnover tax! It is suffered by VAT-able businesses!

    So what this means is that business profits will increase slightly, meaning (hopefully) that fewer go bust and fewer jobs are lost. I have no idea whether The Goblin King & The Badger understand this, but they have, inadvertently, done the right thing for once.

    Well for the first time ever, really.

  2. Mark: Surely any business tax is going to impact on prices and therefore the consumer.

    I think you are right that businesses will largely prop up their margins and profits rather than cut prices - hopefully this will protect some jobs but in the more competitive markets there will be price cuts.

    The big question for me is how is this going to impact on inflation? When Thatcher doubled VAT in the early 80s inflation shot up to 15%. With deflation predicted to be a bigger threat than inflation this deflationary measure cutting VAT could make price falls worse.

  3. "Surely any business tax is going to impact on prices and therefore the consumer"

    Yes of course, but it is a question of degree.

    Hopefully the change will a) protect some businesses and hence jobs and also b) allow for price cuts in competitive markets. Those are both Good Things, are they not?

    As to inflation/deflation debate, that is a load of hot air. Most things have become steadily cheaper over the years (that's what economic progress is about!).

    The impact on prices will be minimal either way, and the biggest price falls will be in housing, which has seen the biggest price rises.

  4. That smoothie maker I want used to cost £24.99, but now costs £24.36 or so.

    Naw, You're right about this. I'm not exactly about to go on a spending spree.