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VAT Reduction...

So, VAT (Value Added Tax) is falling from 17.5% to 15% on Monday.

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.


( 31 comments — Leave a comment )
Nov. 24th, 2008 09:13 pm (UTC)
I think the VAT reduction appeals more to businesses? I mean; if you're paying a bunch of fees from between £1,000 + VAT to £5,000 + VAT to suppliers and agencies then those many 2.5% discounts begin to add up.

If retailers don't pass the 2.5% on then I suspect consumers won't notice and these businesses get some much needed extra cash.
Nov. 24th, 2008 09:17 pm (UTC)
I can't see how retailers selling goods for under £100 can realistically pass them on. Even then it doesn't start making any real and tangible difference until you hit the hundreds or thousands of pounds mark.

Plus businesses claim the VAT back on items they buy which include VAT so it doesn't make any difference to them either. The baseline, before VAT, isn't going down - just the VAT charge itself.
(no subject) - heliograph - Nov. 24th, 2008 09:44 pm (UTC) - Expand
(no subject) - angusabranson - Nov. 24th, 2008 10:12 pm (UTC) - Expand
(no subject) - davywavy - Nov. 25th, 2008 03:12 pm (UTC) - Expand
(no subject) - angusabranson - Nov. 25th, 2008 04:33 pm (UTC) - Expand
(no subject) - heliograph - Nov. 25th, 2008 07:08 pm (UTC) - Expand
(no subject) - pengshui_master - Nov. 24th, 2008 10:16 pm (UTC) - Expand
(no subject) - ffutures - Nov. 25th, 2008 01:09 am (UTC) - Expand
Nov. 24th, 2008 10:02 pm (UTC)
Much of the current economic problem is about fear. So, it makes more sense to spread a hopeful message, even if you don't actually beleive in it or have any evidence to back it up. That's how faith works. Belief based on nothing. It's totally illogical in every way, except for the fact that it seems to work.

As for the odd looking prices; yes I'd pass them on. No question about it. We all criticise the evil energy companies for not doing this, so why would we be exempt from the same criticism? It would be a bad choice not to pass it on. What on earth is wrong with £19.56? I sooner pay that than £19.99. People would appreciate that. They would save enough to buy a chocalte bar.

Also the tax rebate from last year has been made permanent, and increased, so lot's of us continue to not loose the money that it looked like we were going to loose when taxes got adjusted last time.

Not a dud at all.

Nov. 24th, 2008 10:49 pm (UTC)
It isn't trivial to reprice thousands or tens of thousands of items in a shop.
(no subject) - angusabranson - Nov. 24th, 2008 10:58 pm (UTC) - Expand
(no subject) - ian_wyrdness - Nov. 24th, 2008 11:04 pm (UTC) - Expand
(no subject) - actualsean - Nov. 25th, 2008 08:17 am (UTC) - Expand
(no subject) - heliograph - Nov. 24th, 2008 11:28 pm (UTC) - Expand
(no subject) - actualsean - Nov. 25th, 2008 08:15 am (UTC) - Expand
(no subject) - heliograph - Nov. 25th, 2008 07:10 pm (UTC) - Expand
(no subject) - actualsean - Nov. 25th, 2008 08:10 am (UTC) - Expand
Nov. 24th, 2008 10:40 pm (UTC)
I'm still at work preparing our response to the PBR. My step is the last in the chain - sending the email, so I'll be here til 2am at the earliest. I think I could speed things up a lot if I just copied your post and pasted it straight into our VAT section!
Nov. 24th, 2008 10:59 pm (UTC)
I'm available for freelance commissions :p

Hope they're supplying you some food and paying for a taxi home!
Nov. 25th, 2008 02:35 am (UTC)
It depends on the price elasticity of the particular goods in each instance.

However, ceteris paribus, a 2.5% reduction in VAT should result in a 2.5% reduction in prices and thus a 2.5% increase in demand..

Of course, if politicians (and the general public) really listened to economists they'd get rid of all taxes on goods and services and put the lot on resource use.

But then the landlord class would chuck a hissy fit. And we can't have that.

Nov. 25th, 2008 07:12 pm (UTC)
What kind of resource use? I dunno how they do it over there, but I can't think of any resources (water, sewage, energy, land) that aren't taxed over here.

Sales taxes in general are popular because they're easy to enforce and collect.
(no subject) - tcpip - Nov. 26th, 2008 12:10 am (UTC) - Expand
Nov. 25th, 2008 09:20 am (UTC)
If you are as certain as you seem to be, then presumably customers inquiries received over the coming year about why you are not passing on price cuts will be answered with approximately the argument you put forward in this post?
Nov. 25th, 2008 09:27 am (UTC)
I would have thought it would make sense to actually look at what is driving the economic problems for the 'person in the street' in the first place.
I hear three things time and again (as do we all I suspect):
1)Fuel/Electricity/Gas bills
2)Food Prices
3)Mortgage rates

Of these 1 is probably the one that effects most people and is also easily addressed. Force the energy companies to pass on the recent drop in their costs because the price of oil has fallen or renationalise them. Better yet - just renationalise them and then pass on the lower costs. They should never have been privatised in the first place-it was a damn silly idea and results in exactly the kind of mess we are now in.

I imagine that a cut 0f 50% in our heating/electricity bills would be rather more effective than a VAT cut in encouraging consumer confidence...

For the record, I live in one of the wealthiest parts of the UK and even well off people I talk to around here are saying they reducing spending because of these three factors. I really do not know what planet our politicians are living on, but it certainly isn't the same one as the rest of us!
Nov. 25th, 2008 10:43 am (UTC)
On VAT reduction.

TBH most of this is probably ALREADY on discounted goods... So its unlikely shops will discount them (good point about the .50/.95 and .99 though), at the higher rates, its possible that you can now use it to bargain yourself a new lower price, but again, chances were pretty good at that yesterday.

As for businesses that sell goods, if they want to show these new prices all those web pages and catalogues now need to be re-printed and re-issued which is going to be a uneccesary cost.

As for the Tories.

I love their alternate message of freezing our council tax as a better idea. Easy for them to say, after all, it doesn't effect government income, and only covers our own local services. Thus they are offering us a chance to screw ourselves further into the ground on our own doorstep AND claiming the ability to say 'not our fault, blame your local councils' when we realise.

They are all abunch of bastards...
Nov. 25th, 2008 03:14 pm (UTC)
it doesn't effect government income

Yes it does; council tax is paid to your council who then pay it into central government and then ask for it back.
The inefficiency of this extra dual layer of bureaucracy appeals to the centrist economic theorists, for some reason.

Nov. 25th, 2008 03:13 pm (UTC)
All it will end up doing is meaning cuts in government spending because their not getting as much cash in from VAT

No it won't - they've put up fuel, alcohol and tobacco duty to make up the shortfall. No change at all in revenues.
Nov. 25th, 2008 03:27 pm (UTC)
Off the top of my head, a VAT decrease will benefit everyone, pensioners, the unemployed and workers. An income tax decrease only benefits workers.
Nov. 25th, 2008 07:16 pm (UTC)
The VAT decrease only benefits the folks you mention if they actually pass it along, which VAT itself discourages them from doing.

If you dropped the sales tax rate somewhere in the US, they'd pass that along at the register: the sales tax isn't included in the price of the item.
(no subject) - nesf - Nov. 26th, 2008 04:08 am (UTC) - Expand
( 31 comments — Leave a comment )

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