I'm not sure what school of economics Gordon brown and Alistair Darling come from but personally I think this will do f**k all. It won't mean the majority of things that you or I buy will be cheaper. It might make expensive luxury items a bit cheaper - but you'll have to go up a long way to actually start saving any money with this VAT cut.
Most stores will probably just ignore the reduction and use it as an extra little bit of profit. We generally have price points that end in .50, .95 or .99 - that's not about to change. Idf it did here are some examples....
£8.99 becomes £8.80
£19.99 becomes £19.56
£24.99 becomes £24.46
Are those reductions actually going to entice you to spend more money where you would have done before? Are the shops really going to throw out their love of .50, .95 or .99 and reprice their entire range of VATable goods to new lower prices with silly endings?
Of course not in both cases.
Even if I went out and brought a new £899.99 computer the savings I'd make between this week and next on the VAT reduction would be £19.15 (with a new RRP of £880.84). That's hardly about to whet my appetite and get me spending more than I would do anyway!
Even if you wanted to buy a new £20,000 car the difference between this week and next would only be £425.53! Which, ok, is still £425.53 but if you're spending £20,000 on a new car that £425.53 is probably not the deal killer in the first place!
These cuts will not stimulate the economy in the UK. All it will end up doing is meaning cuts in government spending because their not getting as much cash in from VAT. Whilst it's a small cut for us to make it meaningless if you remove that 2.5% from the millions paid in VAT every day to the government it all adds up and that loss has to be covered by something. Personally I'd prefer them to have kept the old VAT rate of 17.5% and kept money invested in education and welfare (for example).
If they really wanted to make an impact - and a more visible one even though it still wouldn't amount to much on a day to day basis for most of us - I'd have cut the income tax rate by 1% or so. Atleast then it would give the impression that everyone was getting a bit more money each month even if it really only amounted to £10 to £25 a month for most people!
So, a bit of a dud from the government today in my opinion. I'll be interested to see how the papers and stock markets feel about it but personally I can't see any of this making a blind bit of difference to anyone apart from companies that will pocket that extra 2.5% they are now making by keeping the prices the same.