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VAT up, down, shake it all around

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MFI and Woolies gone bust, household spending down to its lowest level in 13 years, more banks facing nationalisation, the government desperately pressuring banks into lowering their lending rates, the Organisation for Economic Cooperation and Development warning that the UK faces a much deeper recession that first expected. And these are just a few of the headlines from the past couple of days.

Rome is definitely burning, so what’s Nero doing? Fiddling – with VAT. If we understand it correctly, there’s going to be a temporary 2.5% reduction which Alastair Darling hopes will encourage people to start spending again, probably one of the dumbest and most desperate moves we’ve seen from this flailing, failing government. Just to put that into context, imagine a plasma screen TV with a pre-tax price of £500 – add 17.5% VAT and that’s £587, but at the new rate of15% the price would be £575, a massive saving of twelve whole pounds.

Hands up everybody who wouldn’t consider spending £587 right now, but would consider spending £575… Anybody? Thought not. So not only is this cut unlikely to increase consumer spending as intended, it’s also going to cost retailers millions of pounds to re-price and re-label their stock – a move which was supposed to help UK businesses will actually end up hitting them where it hurts at one of the worst possible times.

On top of this, the cost to the government in lost tax revenues is likely to be about £12.5 billion over the course of the year, and right no the government really, really can’t afford to lose that money, so guess how it’s going to be recouped… yup, big fat tax rises in the future.

This is the sneaky part – for the next twelve months, those who are rich/stupid enough to be spending wildly while we head into a major recession will make some fairly inconsequential saving, and then the tax rises will come after the next general election, which the government almost certainly knows it cannot win. So, the Tories are pretty much forced to push through the planned tax increases on high earners or risk cementing their reputation as the nasty party which only cares about looking after rich people. But this will, of course, damage Tory support amongst middle class voters – where they traditionally get most of their votes from.

So, this headline grabbing VAT cut will probably do absolutely nothing to help the economy, but it does plant the seeds of a Labour party comeback campaign for the 2014 election. Still, it’s not a done deal yet – Darling has announced tonight that the cut will be put to a parliamentary vote, although it’s a brave politician who’ll vote against tax cuts.

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