According to the BBC, VAT is going to rise to 18.5% in 2011. Finally, all this stuff on VAT makes sense to me.
To some extent, I actually disagree with a large amount of the Tory blogosphere over this VAT cut – on first impression, and when done correctly, it ought be quite a clever way to get people out spending and kick-start the economy1, as long as (and both these things are important) the cut was significant, and the rate moved to a high level shortly afterwards.
Something along these lines: ‘VAT will be at 12.5%2 for 12 months and then move to 22.5%’
It seems to me that if you want to encourage consumer spending in the near term, the easiest way to do it as absolutely assure people that the price will be going up in the near future. Shops do this all the time – it’s why they offer January sales. It’s not the fact that the prices are cheaper in January which encourages sales, it’s that they’re more expensive for the rest of the year.
Telling people that the TV they want to buy is £500 today, will be £450 tomorrow, but will be £550 next week seems like a pretty good way of convincing them that tomorrow is the day to buy, and definitely before next week. Alistair Darling’s plan, however, missed the crucial third step – without the large rise in VAT at the end, there’s no incentive to buy now.
If you’re going to use tax rules to encourage behaviour, you ought to bloody well do it right.
Labour have taken what could have been the most useful part of their tax policy, they’ve watered it down to the point of absurdity, then they’ve hidden it away in fear of the political recriminations. When it was found, they told us that they didn’t mean it, and that their real plan is the original, even less effective-sounding one. Conviction politicians? I think not.
- My company are taking the initiative on this and working to convince our customers (home improvements companies, in general) to ‘Match the VAT’ and drop their prices by a further 2.5% for Christmas. Quite clever, I thought… [↩]
- Before you tell me so, I do know that we can’t reduce VAT below 15% due to EU regulations – but I consider that an argument for getting rid of the regulations and running our own damn economy. [↩]
That pre-supposes that people are in the position to increase their spending or bring it forward. The people likely to be in such a position are those a bit higher up the income scale, whereas it is those at the bottom whose wealth needs to be boosted to get them spending. People higher up the income scale are likely to save the tax cut rather than spend it. That is why an increase in the income tax threshold would boost the right people.
Blue Eyes
November 26, 2008 at 8:14 am