Tuesday, 25 November 2008

Thoughts on the Pre-Budget Report

Enough has been written elsewhere regarding the government plans to stimulate the economy with a 2.5% cut in VAT (the first cut to VAT for over 30 years) and a 45% tax rate for all earnings over £115,000 so I won't really go into it in detail here.

Just wondering though, if either the government, the opposition or those reporting the story think people are stupid. Take these positions:
  • The government: believes if it cuts VAT people will spend more money (despite it only making a 2.5% difference in cost!) rather than save it for what they think will be tough times later. They also think that further tax on the rich will boost government coffers.
  • The opposition: believes that people won't spend more due to tax cuts - they'll save it for when the taxes not just returned to current levels but increased. They think the government plans are a short-term fix, and that increased borrowing will put a massive strain on the economy.
  • Those reporting: think that if they report concerns that the economy will go to the ground if people don't spend more money then people are more likely to spend instead of saving, probably out of patriotism/ willing the economy to recover.
Have I summed up the respective positions correctly? And if so, don't they all presume people are, well, stupid? Because I don't think it is quite as simple.

People will probably spend a bit more now VAT has been reduced - in the short term - but they'd probably decided on a budget for Christmas, and will probably stay within that limit (and I know my limit is pretty low, regardless of any change to VAT). But after that, into the New Year, people are less likely to keep digging, fearing a huge tax hike - so instead put their money away in bank accounts.

So the government is probably right - their idea will stimulate the economy both short and long term. In the short term, it will be the British economy. In the long term - the Swiss (think about it).


Yousuf Hamid 25 November 2008 at 09:33  

people are focusing on the final consumer but remember everyone pays VAT from manufacturing all the way through to retail (they always then claim back the last vat and pay more for the vat they are charged to the next customer) so all together it works out at quite a lot of savings which is why it costs so much.

Being a bit of a pedant...,  25 November 2008 at 10:02  

Cutting VAT by 2.5% does not reduce the cost by 2.5%. Presuming the saving is past on to consumers (and not simply kept by the businesses as much needed margin)then the price will change from 100%cost+17.5% VAT (117.5) to 100%cost+15% VAT (115).

117.5 to 115 is roughly a 2.1% difference in cost.

Malc 25 November 2008 at 10:13  

Being a bit of a pendant - thanks for that.

I think the point I was making was that 2.5% is not really enough to get people thinking "Bargain!"

A 2.1% difference in cost is even less - which makes my point... better than I did.

Malc 25 November 2008 at 10:16  

Yousuf Hamid,

I'm not sure your point. Are you saying that the £12 BILLION cost of making a 2.5% reduction in VAT is good because everyone - from manufacturers to consumers will get the reduction?

Or are you saying that the £12BN cost to the economy is hard to justify for a small - 2.1% difference - in cost?

Holyrood Patter 25 November 2008 at 11:59  

Malc, the Labour spin is that if you buy a packet of crisps, there is VAT reductions on logistics and manufacturing costs, aswell as foil production and other such minutaie. As a result the savings should be nearly double figures.
Im not really convinced it will work that way.

Neil,  25 November 2008 at 13:33  

The VAT cut will not bring real benefits to the Scotland or the UK. Not only will it not drag out a large enough crowd of people to spend any more than they already would (as you said Malc folk have budgeted already)but the majority of those products that VAT applies to are IMPORTS, therefore lining the pockets and providing jobs to OTHER countries. Darling and Brown just can't see past their likely election in April/May.

Sam 25 November 2008 at 17:50  

VAT cuts save you money whether you plan to spend money or not. Therefore they add to disposable income or can aid people in paying off mortgages or loans that they might otherwise be struggling. Just keeping spending at more normal levels is good enough to help fight a general slowdown in consumption.

VAT cuts applies to, and so benefit, everyone in the manufacturing to retail chain, as Yousuf said. It also aids charities & others that can't claim back VAT, a particular benefit in times of tight credit. No idea where Neil got his import idea from but it will put £12.5 billion into the economy, funded by the top-rate tax increase.

Malc, we now know there will be no huge tax hikes. Increases in National Insurance are timed for April 2011 when the Treasury (and Bank of England & The Economist if you doubt Treasury growth estimates!) thinks we will be out of recession. Yes this will be painful for many and uncomfortable for more. But it should just about stop it being a disaster for us all.

PS You have a Swiss bank account?! Quit moaning about your low limit!

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