A local example illustrating VAT nonsense

Reinforcing my strong criticism in previous posts of the temporary cut in VAT rate is an item I heard on BBC Radio Devon this morning. They were interviewing a lady who owns a boutique in Tavistock. She stated that all her stock is for sale at 50% off. No, correction, there are some items where the discount is even greater than this apparently. With reductions of this sort of magnitude the change in VAT is obviously just a pinprick.

I rest my case.

VAT argument: Frank Field 1 Ken Clarke 0

At the back end of November when the reduction in the VAT rate was announced I was quite clear in my own mind that this particular policy wasn't going to do the job intended. There doesn't appear to be any evidence that it has motivated shoppers to go spending again, not that it would be easy to judge whether any extra activity would be down to the VAT cut or more likely the massive discounting taking place on the High Street. Interestingly Simon Wolfson of 'Next' and Sir Stuart Rose of 'Marks and Spencer' have poured cold water on the VAT plan this week.

This whole VAT thing came up for debate in the House of Commons last month and the government comfortably won the vote with a majority of 80. One Labour MP who voted with the Tories and LibDems was Frank Field. Now I am an admirer of Frank Field who is quite prepared to assert his independent view and go off message, we need more like him. It will be remembered that he led the rebels causing the government to cave him over the matter of the 10p tax rate. Incidentally what Gordon Brown did for purely political purposes, abolishing the 10p rate in his final budget, is something I believe should never be forgotten or forgiven.

It was former Tory Chancellor Ken Clarke who was one of the first cheerleaders for the VAT rate cut but I can't help thinking that perhaps he is feeling a bit silly now. Clarke is generally credited with doing a good job looking after the Nation's finances in the dying years of the Major administration and has business experience as well. Therefore I was surprised at him taking the stance he did on the VAT.

There are of course instances where the consumer will clearly benefit from the VAT rate change, particularly on the service side as opposed to retail. An example - a car needs £300 of work done on it to pass the MOT test. This is essential expenditure not discretionary purchasing. As such the saving on VAT would prove to be very acceptable! In the HoC debate Stephen Timms for the government reckoned that the average household spent £900 a month on VAT rated goods and services which would mean a saving of £20 per month following the VAT change. Put like that it sounds good but (a) I'm dubious about the figures and (b) I don't think that is enough money to make the family go out and spend the saving. It might go toward paying off a credit card bill (no bad thing) but stimulate them to spend more in the shops? I don't think so.

Bearing in mind that the VAT rate change was the flagship policy in last year's pre-budget report it looks as if the government aren't very keen to shout about its supposed benefits at the moment. My gut feeling is that it's there because of the insistence of the old chancellor (Brown) rather than the present incumbent (Darling).

I don't think the VAT cut will work

Roll Up! Roll Up! Starting Monday for the next 13 months a massive national sale! Great 2% saving on most of our lines! Now I don't have a heavy consuming lifestyle so perhaps I'm not a good person to make this judgement BUT I just cannot see a significant amount of extra spending by the Great British Public as a result of the VAT reduction. The 2.5% drop equates to approximately 2% of the total selling price and for the life of me I just can't see that igniting a spending spree, I really can't. Retailers might up their sales by really slashing prices even as Marks and Spencer did the other day for just one day but the VAT reduction is so minuscule in real terms that I don't believe it will materially affect buying decisions.

Businesses aren't too happy I understand with all the adjustments they are having to make to their computer systems etc to accommodate the VAT change, and knowing that they will have to repeat the exercise in 13 months time. For all their alleged support for small and medium sized enterprises (SME) it seems that the government just do not understand how things work at the sharp end. Quite a number of businesses are reluctant to lower their prices to reflect the change in VAT and I don't blame them.

The government's projections in last Monday's PBR are so optimistic that they don't seem real to me. It would be nice if the recession was short and shallow but I just don't see it happening that way. Labour figures for borrowing and later repaying our debts seem to be based on a best case scenario, if they have called it wrong then our problems will be much worse than we can imagine.

VAT to be reduced or a huge bluff

The mainstream media (msm) are full of stories about an impending cut in the standard rate of VAT from 17.5% to 15%. This, we are told, is going to be one of the planks to be announced in the Pre Budget Report (PBR) tomorrow afternoon in the attempt to stimulate the economy. But is it all a huge bluff to wrong foot the opposition I ask myself. If we assume that there will be a VAT reduction then letting that information out early seems totally bizarre - it allows the opposition parties to examine the arithmetic and prepare a counter-attack.

If the 'leak' was deliberate then once again it shows the huge disdain of one group of people to the rest. The Chancellor is to make his statement to MPs in the House of Commons and it could not be more wrong for them to be getting information already in the public domain. I think I've blogged before (or at least I certainly meant to) about the way that the main thrust of someones speech is released to the media prior to the audience listening to the speech get to hear it. This is very discourteous and absolutely unacceptable in my book, yet it is taken as normal procedure these days. So far as the lowering of standards in public service is concerned this is a prime example. Of course the media are benefiting from this so don't expect any interjection from them about this practice.

For the sake of argument let us suppose that VAT will be reduced by 2.5%. Now imagine someone going into an electrical shop to buy some white goods costing, before VAT, £300. The VAT on this at 17.5% is £52.50, reduced to 15% it would be £45 giving a saving therefore of £7.50. Now would the prospect of paying £7.50 less on the item actually sway the purchasing decision. I would say probably not. However seeing a big notice saying £70 off (because the retailer needs the sale) might do the trick. Because of sluggish sales prices are likely to fall anyway without state intervention. In fairness I have to say that some businesses might gain to a degree with a VAT reduction e.g. a service industry where they have to invest in a stock of spare parts which may only trickle out as sales go fairly slowly.

Another aspect of VAT reduction is that it is mainly of benefit to the very well off who have a high consumption lifestyle. For those of us whose main outgoings are things such as food, rent, mortgage, council tax help with VAT is not very relevant. As I hinted at the beginning it may all be a con anyway and VAT rates won't be touched. In less than 24 hours we will all know.