25 November 2008

Yo momma's VAT

I thought I'd briefly jump on the bandwagon and mention, in passing, some of the conclusions from the pre-budget report.

Now, bear in mind that I work as an Accounts Payable Finance Assistant, so yesterday and today has seen me watch hysteria unfold at management-level, with no one quite sure what the change will do to some of the software used, and some of the bigwigs showing that even they aren't totally sure of all the tax codes we use at work. So it's been carnage, but I'm low enough in the food chain to avoif most of the madness. When the first 15% invoives come through, however, that's when I'll be hit.

Anyway. I can see what Darling is trying to achieve by cutting the Standard VAT rate.Well, other than a short-term political gain and a series of economic chickens that only come home to roost once the Tories take charge of the henhouse. He's hoping that we, as consumers, will go, "Oooo! Things are cheaper! Let's buy stuff!"

But there are hitches.

Firstly, this hinges on you being able to afford anything at any price in the first place. Let's be honest, if your employer has just had to either reduce your hours or lay you off altogether, a 2.5 percentage point cut in the VAT rate isn't going to make much of a difference - you are not going to be able to afford that XBox. End of. Now, Darling hopes that the VAT decrease will help people afford things more easily, so they'll buy things and so keep people in work. The likelihood is that people will still be put off from making that purchase.

More than that, this isn't all that big. If you're buying something that was a VAT inclusive £100, it should cost £85.11 net. So with 15% VAT it'll set you back £97.88. That's a cut of 2.12%. Some discount! Are you really going to buy that new gizmo?

And of course, there's no guarantee that retailers will pass the savings on to the consumer. That £2.12 could still find its way into Tesco's coffers rather than either heading onwards to HMRC or staying in your pocket.

Oh, and heating bills will have to rely on changes in the market if they're to come down: in most cases, VAT on fuel bills stands at the Reduced Rate, which holds steady at 5%.

And most foodstuffs are zero-rated, so again, it's fluctuations in the market that will determine their price. Plus which, with fuel duty going up to keep the price of fuel (and the Treasury's profit from your visit to the petrol pump) steady, the cost of transporting anything to the shops, and then onwards to your home, is affected only by the price of oil and the prospect of a forecourt price war.

So let's recap: the discount isn't all that big anyway; your employers (and their creditors) have the final say in whether or not you're still making enough money to buy something at any rate of VAT; the price you pay will still be determined more by Tesco or Asda than by the Treasury; your petrol costs will be settled either by OPEC or BP; your heating costs will be decided not by HMRC but by Scottish Power or EDF and your food bill won't change. This cut in VAT looks good but does nothing.

But in fairness, that's all the Government could have done: most of this is in the hands of the banks and the markets, but we can't vote on them so it's the Government that carries the can. They can't really do anything but cross their fingers, but they have to do something, and more importantly, have to be seen to be doing something. That's what they've done - they had to, and deserve 10 out of 10 for effort if nothing else - and now they have to hope that they don't make things worse.

But here again: we have to start revisiting this by 2010, and most (though not all) of the tough decisions will take place in the next Parliament. Now, Darling is taking a gamble here that Labour will be in Opposition in the next Parliament, that the latest recovery means they aren't facing the drubbing pundits projected in the Summer, and that the Tories will have to make all the tough calls. If that happens, they'll see their support plummet as a result, and Labour are back in business by 2015.

Even so, it could backfire: the Tories could come out of this quite well or the electorate could display the same long memories that turned people off Labour from Callaghan up until Blair and the Tories from Major up until now, in which case it'll be the early 2020s before Labour can form a government again. Or Labour could end up somehow winning the next election narrowly, in which case they have to make the tough calls, they'll be out on their ear in 2015 and it'll be the late 2030s before Labour can form a government again. So even politically, it's a gamble.

And it's a gamble that involves massive levels of Government borrowing. The Treasury wants a consumer boom, funded by credit which the borrowers shouldn't really have but have managed to get a hold of, at great risk to their own financial health and that of the lenders.

Isn't that the phenomenon that got us where we are today?


Scott @ loveandgarbage said...

Iceland here we come?

Anonymous said...

i agree, most people won't notice the couple of quid in every hundred they spend, especially when it doesn't include petrol, food, heating/power etc.

I'm not convinced either that retailers are going to pass on a vat cut for items that they have carefully priced at say £5.99.....so it might help retailers.....and might...just might keep them in business and employing folks for a bit longer.

On the other hand, i read this:
now, can anybody tell me why that wouldn't have been a better idea, i mean they are a labour government aren't they?

Stuart Winton said...

I agree with much of what you say about the VAT cut, Will, but the thinking seems to be that even if people don't go daft and some don't react at all to the lower prices, on the other hand leaving £x billion in the hands of consumers rather than the Government is bound to have some effect on consumer demand - only a marginal difference in economic activity can tip the scales either way, qand it's the cumulative effect of lots of little transactions that matter, no the fact that it won't make a huge difference to individual people.

I think you're right to say that much of the VAT decrease won't be passed on, however - the practicalities of changing prices for small value items such as you would find in a corner shop or restaurant and the like are enormous. Something like a haircut, for example, currently costing £6 (OK, I go to an el cheepo barber!) isn't going to change in price, and the hairdresser will just pocket the tax reduction. (I'm assuming haircuts are VATable, but I could be wrong, but it's just for illustrative purposes).

However, the experts at the Treasury and HMRC will know this, and will be assuming that a certain amount of the cut simply won't happen, but on the other hand there's no guarantee about anything really, it's all just an educated guess, basically.

As for your final point about debt, I think the problem is that if all the indebtedeness is unwound suddenly then that's what causes the economy to slow down to quickly. Thus is essence the Govt is taking on debt to stimulate overall demand due to consumers doing the opposite. Of course, it'll all have to be repayed eventually, but the trick is to do it as smoothly as possible and avoid sudden lurches and the possibility of consequent economic catastrophe.

Ray Stewart said...

You have some good points but you didn't mention the overall level of debt we as a country will be in within a year or so, over £1,000bn.

That is a serious figure to conjure with and try to shove under the election carpet.

Norman said...

Legal challenged launched against Mandelson.

As their release says: ‘Lord Mandelson, in our view, is acting unlawfully.’