The reduction in VAT is a half-measure that wont work
A 2.5% cut is miniscule. It is a saving of less than 20p for every ten pounds spent. And that’s if the greedy shops even pass on the discount. This idea, the centrepiece of the rescue package will do nothing to help poorer families and will certainly not help stimulate the economy in any meaningful way.
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It wont be passed on by the shops
Shops wont bother reducing things by 2.5% - they’ll just keep the prices where they were and pocket the difference.It will be exactly the same as happened with the banks and the oil companies. All they do is see this as an opportunity to earn a bit more money whilst ripping off the poor powerless consumers. And the Government will be unable to stop them.
This discount will be so heavily publicised the shops will HAVE to reduce their prices. People will expect a discount and they’ll demand one if it isn’t given. Besides shops compete with each other much more than banks and oil companies and if one offers the discount the others are going to have to follow. People are incredibly price-sensitive now and if they start preferring your competitor are you really going to keep 2.5% but potentially go out of business?
It’s not enough
A 2.5% cut will make no difference whatsoever. An item costing £11.75 will cost £11.50 after the discount, a difference of a whopping 25p. Is that really going to get people to start buying more? How can it when really big discounts, such as the ones made by Marks and Spencer last week, are the only things that get people’s attention and into their shops.
This reduction will cost about £12.5bn, but yield only about £200 per annum for an average earner.
We don’t need to buy £11.75 items we need to buy £1,117.50 items and the savings here will be a much more useful £25. Besides, this discount will be added to by the shops who’ll reduce their prices by way more than 2.5% and the combined effort will get people spending again.
In addition, because of EU regulations, no country is allowed to reduce it’s VAT rate below 15% without agreement from Brussels.
Wont give us the help we really need
Mortgages will not be affected by a cut in VAT, nor will rent, food, council tax, water rates or loan interest. Home gas and electricity will only see very small gains. These are the areas where we’re really suffering and nothing in this package will help.
The bank rate is coming down and that will help mortgage owners. If the cost of borrowing goes down for banks then loan rates will also come down. The cost of food is already being reduced thanks to the fall in oil prices. So help is coming for these things, just from a different direction.
The help we really need now is in stimulating the economy by getting us to spend more. We need to help shops and the producers of goods and services get through these times which means we need to spend money. A cut in VAT will help us do that.
It will just benefit the better off
The only people who’ll really get benefit from this tax cut are those who can afford to spend thousands of pounds on items, anything less than that and the savings are minimal. These people don’t need our help, they’ve got enough money as it is. The people really suffering are the poor and once again they’re being ignored.
VAT is a regressive tax. It already affects poor people more than rich because everyone pays the same rate regardless how much they earn. A cut in VAT will help rich people but it will help poor people more because the amount they are taxed relative to the amount they own will go down.
It will hurt shops who have to implement it
This change will cause massive problems to shops who need to now change the price of everything on display. How much is that going to cost them? How long will that take? This idea has been poorly thought out, just like most of the New Labour ideas, it sounds good on paper but trying to make it work will undo any of the benefits it brings.
That shirt marked as £19.99 today "should" be £19.56 on Monday and the new computer game costing £39.99 today "should" be £39.14. There is one retailer who famously only charges in whole pounds - what will they do?
All the big shops work on bar codes, and can therefore change all their prices simply by altering fields on a computer. Smaller shops have fewer items and so it will take them less time. This will hurt shops, it will cost them money, but if it keeps them in business it will be a cost they’ll happily bear.
Also on the plus side, with all those catalogues and labels needing to be redone the printing busimess will have a boom!
Shops only have seven days to implement the changes
Shops will now have to give staff overtime in order to ensure all their prices have changed by Monday. This extra cost, alongside the increases in National Insurance, will counteract any benefit of extra sales and wont help hard-up shopkeepers stay in business. The whole idea has been poorly thought-through and badly implemented.
It is not an obvious, visible benefit.
Rise in income related to a decrease in the consumption tax is not as visible to consumers as say a tax rebate check, tax refund, or even income tax reduction all of which are highly visible.
It is only a short term solution - we need to think longer term
Third, relatively speaking, UK consumers already spend a large amount of their income on consumption; while it is important to raise this value in the short term, it will not do any good if measures aren't taken to alter household spending behavior in the long term. Measures that only the government can and should make include regulating the terms of the loans offered by banks, establishing restrictions on the level of leverage both banks and consumers can mainain, etc.
Some of the industries impacted most by the recent economic contraction are the finance and natural resource industries. The UK has been a center of global finance for a long time and can solidify its position by profiting from the atrocious management at their New York counterparts. The Labour government should avoid making financial institutions the scapegoat for the recessions (though they do bear a fair share of the blame). Excessive regulations on capital (especially protectionist measures to limit foreign ownership of key firms) would be disastrous and allow more competitive regions to steal market share (e.g. Dubai). Natural resource industries will do just fine once the economy recovers as indicated by pre-crisis profits; the government should resist concesions to them at all costs.
Better than tax cuts
Recent history has shown that in times of economic downturn people don’t spend tax cuts they use them to reduce their debt or they put it away for a rainy day. This is not what the economy needs right now, it needs people out there spending money keeping businesses in business. The discount is not huge, but it’s all we can do right now and it’s better than cutting taxes.
Spending is what got us into this mess, we don’t need to spend more we need to spend less, we need to get our borrowing under control, save money for our future and stop bankrupting our grandchildren.
VAT affects everyone
A cut in VAT is the best way to put money into the economy as all of us buy goods with VAT. Not everyone pays tax, not everyone understands how to get tax credits. Everyone pays VAT, therefore, this reduction is the most democratic, and the most widespread change they could possibly have made.
A cut in VAT will benefit rich people more than poor. They spend more so they’ll save more. Cuts in the lowest band of income tax would help the poor who, let’s face it, are the people really suffering right now.
It’s about time it came down
VAT was increased to 17.5% by a Tory government as a temporary measure. Fourteen years ago. It’s about time this regressive tax came down.
Compared to other countries 15% is pretty low
Denmark Norway and Sweden all have 25% VAT .If ours is dropped to 15% it will be one of the lowest rates in Europe.
15% is the lowest rate permitted in Europe but this is all relative. Switzerland, for example, has a 7.6% VAT rate!
It might provide a welcome boost for the car industry
The car industry is suffering greatly with the recession and automakers in the US have urged Washington to give them the same sort of breaks they've given the banks. The car industry employs hundreds of thousands of people directly and millions more indirectly. The cut in VAT could help save those jobs if people buy new cars.
13 Month Limit
The 13month limit to the VAT reduction means people will be encouraged to spend now. This is a great way to give the economy an instant boost through encouraging the public to spend.
Some have been labelling these moves 'the great DFS sale' - 'buy now pay later' seems to be the attitude here, as the government reduce people to be short sighted in their spending : the very reason we got into this mess in the first place.
What do you think?