I agree entirely on the VAT change; it's pointless jazz hands economics, it's not going to effect anything meaningful.

The only thing it would have been nice for (fuel) they've put up to compensate it for, which will remain in after the VAT change has gone back again.

It's just...ARGH...they could have done so much better!

Definitely; I think an income tax or NI reduction would have helped (but they're putting NI up soon).

Plus retailers have to change all their price tags; they're going to love that!

Messy. Not good.

Edited at 2008-11-25 11:34 am (UTC)

jazz hands economics

Great phrase :)

As I understand it, the idea behind a VAT decrease is that you make it temporary, and say, "Hey, right now you get a discount on everything you buy. 1 year only special offer must end soon!!", and make it clear that you'll hike VAT up again to previous levels shortly. And that hopefully encourages people to spend their money now rather than later.

I think the idea's flawed in this case though for a few reasons; they were limited to a 2.5% cut (which is nothing) thanks to EU regulations, shops are already widely discounting things (as you observe) and people are too scared (quite possibly with good reason) to go splurging their money right now even if they do get £2.50 off with every £100 they spend.

I'd also rather have seen more money put into the lower income brackets - they're the ones who, not to put too fine a point on it, might well spend it on expensive trainers and large screen TVs.

It's pretty bloody serious, since a carefully targeted fiscal stimulus could have worked IMO. This will just increase the enormous level of national debt further.

Benefits increases are probably the best way to get people to spend money - JSA is so low atm that people would have to spend the extra money.

Hehe, I think for the first time in ages we're broadly in agreement on LJ! :D

The current package doesn't make much sense to me. I'm fine financially and haven't really been cutting back much on spending, but they're cutting my taxes (I get more than £100 more/year with the new budget).

People like me are totally able to carry their current tax burden - we don't need a tax cut in order to get us to put more money into the economy.

But benefits increases would possibly still be politically unpopular.

I thought the rule on VAT was that once VAT had been charged on something, the rate had to be at least 5% for evermore. I don't understand why the government wouldn't be allowed to cut VAT below 15%, given that VAT on fuel was cut to 5% after Labour got in.

It's pointless. As everyone and their dog is pointing out, a 2.5% cut in VAT will do nothing for prices because most price points are exactly that, price points - why go around changing labels to read £4.87 instead of £4.99?). The company might make a little more on a sale, but the consumer won't get anything.

Well, I take that back. If you are spending a lot then it is worthwhile. Who has the money to spend a lot today? In the main, rich people. This is a tax cut for rich people's benefit, dressed up as a tax cut for poor people. Maybe it will stimulate them to spend more in expensive stores that never have sales, who knows! Still, if you want to buy a £50k diamond, now is the time to do it!

Also, because fuel duty has gone up to account for lower VAT, the cost of delivering products has gone up by around 2-3% (they can't claim back fuel duty, only VAT). That means that the cost of VAT exempt goods such as food, etc., will go up. These are what people buy every week, so I think that many poor people will actually spend more as a result of the VAT drop than before.

Other things are better for poor people, right now. The NI lower limit has been raised, and the 10% tax band rebate thing is permanent. Hopefully this is a first step to eradicating NI and merging it with income tax (employers' NI can remain, as it is a hidden tax anyway), and then fixing up the proportional taxation rates and bands to be fairer all around.

The messing with taxation above £100k won't do much except make things more complex. Only a tiny minority of people earn that much and the raise is miniscule. When the going gets tough, and there is no money available in the lower and middle classes, you have to get it from the rich (with the promise that a boosted economy will rake them in more money than they lose overall), the people who have been benefiting from the economy in the good years before.

When I wrote "right now" relating to taxation changes I meant, of course, when the tax changes are made after the next election. Both parties will be forced to increase taxation as a result of this, it just remains to see how the tories would differ.

I think hairyears was claiming that the >£100k band was not such a small minority. http://www.statistics.gov.uk/cci/article.asp?id=2022 suggests that it's close to but below 20% (Appendix 1 is an interesting read there too)

It's a bit random. However, one thing it might help is by keeping medium-sized businesses in better cashflow - as I understand it this reduces the amount of money they need to keep on one side for HMC&E, but I could be wrong.

One possible problem with Keynesianism in a globalised economy is that much of the stuff we buy in shops is imported; the extra money heads out of the country pretty quickly. In order to keep it circulating in the UK it needs to be spent on services, which are often the luxuries which are first thing to go when people are short of money. That and the financial services industry, which isn't going to be bringing money in for a while.

Because the poorest don't pay income tax, or already do so at a very low rate. On the other hand, VAT disproportionately affects people who need to spend a high proportion of their disposable income on VATable things, like food and heat.

"Non-luxury" food is zero-rated for VAT, and fuel is on a special low rate already.

VAT makes perfect sense to me - you can't conceivably save a VAT cut in the way you could a tax cut or a benefit rise. With VAT reduction, the Government finances only take a hit when someone buys something at retail; with the other types of fiscal loosening, the Government could pay out but people save it. And it can happen faster - with tax cuts and benefit rises, you have to get all the systems updated to get the money out to people before they notice the money and then (hopefully) spend it.

Entirely agree with you that it's too small to make the difference required.

The Tories are talking obvious bobbins - how anyone serious still thinks that monetary policy can fix these problems is beyond me. The Bank of England and the Fed have tried that and failed - with the Fed it's as if they pushed so hard the money supply lever has come off in their hand.

I can save a VAT cut. If I was going to buy something anyway, I can now buy it for cheaper and save the difference (or I buy it for the same, and the retailer saves the difference).

A VAT cut only seems to be a success if it makes people buy more or higher value things than they would have otherwise (if your aim is to stimulate the economy).

I was wondering whether cutting employers' national insurance would be a good way to reduce job cuts, make people feel more secure in their jobs, and make people more willing to spend the money they have.

Although arguably there's been too much retailing in this country, so we *need* the retailers to feel some pain while other sectors of the economy make up ground.

Honestly? All of these ideas -- from VAT cuts to massive corporate bailouts -- are merely grasping at straws. The financial system as a whole is seriously broken... in a number of different ways.

Some of those cracks are now coming into the light for the first time -- like credit-default swaps (which, until quite recently, no one outside the world of finance had ever heard of). Others -- like the fractional reserve banking system and the massive trade deficit -- have been lurking in shadows literally for decades... and are still not being addressed.

I have been predicting a Great Depression type crash for years now. It is wryly amusing to see people over-reacting to the current crisis with hyperbole references to the G.D. all of a sudden... but this isn't it. Indeed, it is equally amusing to see people breathe relief after the market has had a surge and say "Oh, never mind. No Great Depression II after all." Only to watch it plunge again days later.

No, one way or another, this crisis will be weathered. But the big crisis is coming... and this just might be the start of it. Personally, I hope so. Because the longer we put it off, the worse it will be. Look at the current economic climate, and compare it to the recession from 2000 - 2002. This one is definitely worse. Well, what got us out of the last one, when the dot-com bubble burst? Mainly it was a lowering of interest rates that caused a housing bubble instead. Lower interest rates meant that home prices skyrocketed, bad loans proliferated, and people pilfered home equity that they imagined they had to go on vacations. Debt built up -- both personal and in the finance sector -- so that when the housing bubble broke, things were far worse than before the housing boom began. Putting off the huge crash even further is only going to make it, when it inevitably hits, that much more painful.

To be fair, I don't know too much about the UK finance and economy. I do know a fair bit about these systems in the US, though. And that is where my prediction of a massive crash comes from. Of course, the US economy is so huge that it will take the world economy with it when it goes -- we are seeing hints of that even now. And the UK is doubly cursed, as it will not only be pulled down by the US crash... but it has made the poor decision to mimic US economic policy!

Let's just say for a moment that you had the reins. What would you do right about now?

VAT is a regressive tax. Therefore cutting VAT does disproportionately benefit the poor. Increasing the personal allowance, which is the most effective income tax change for helping the poor, gives an equal benefit to everyone. Of course, one could combine an increase in the personal allowance with an increase in the basic rate, so that the net effect was neutral for people on, say, £30k, positive for those below and negative for those above, but it would be politically unattractive.

You're probably right that the VAT decrease won't actually be noticed by consumers (an item costing a £1000 will now be £25 cheaper, which is peanuts), but it will nevertheless leave consumers or retailers (depending on whether the decrease is passed on into the label price) will have that little bit more cash left at the end of the month. That won't encourage them to go out on a spending binge, but it may remove the necessity for retrenchment.

Increasing the personal allowance, which is the most effective income tax change for helping the poor, gives an equal benefit to everyone.

It doesn't have to be that way, and there is an example in the PBR itself: from 2011/12, the personal allowance is to be abolished for earners over £150,000 and reduced in value for those between £100,000 and £150,000.

VAT is a regressive tax.

Only above a certain level (and even then only by virtue of being less progressive than some alternatives).

If I earn £1000 a month and spend it all on rent, food, clothes for my kids, and heating my house, I pay around £2 a month VAT (on the heating).

If I earn £2000 a month and spend £1000 on rent, food, clothes for my kids and heating the house, and £1000 a month over the year on a new car and a foreign holiday, I pay £177 VAT.

Edited at 2008-11-25 04:43 pm (UTC)

And funds for motorway expansion. You may imagine how unspeakably not delighted I am.

It's being sold as a gift to consumers, but it's really a gift to businesses, many of whom won't in fact drop their prices. 2.5% will make bugger-all difference to consumers, but a few percent either way can be life or death for a small business.