Thursday, December 11, 2008

More on the VAT cut

Lots of people, including Cameron, and Germany, have been ruishing to claim that the Vat cut "won't work", just 11 days in. Their reasoning seems to be that the VAT cut involves a loss of tax revenue, which will have to be borrowed, which in turn will make people wary of spending as they worry about future tax rises to pay for the borrowing.

This argument ignores one fundamental point: in downturns, sales fall, and thus VAT revenue received will drop anyway. Therefore anything the government can do to support consumption, supports tax revenue and mitigates the need to borrow.

John Lewis says that the VAT cut has worked. They say that sales for the first week of December are down 6.7% on the equivalent week last year, but that sales in the pre-VAT cut period were down 13%-14% on equivalent weeks last year.

Lets say for ease of calculation, that John Lewis made sales of £1 million per week last year. A 13% drop in sales equates to £130,000 in lost sales and £19362 in lost VAT revenue at 17.5%. A 6.7% drop in sales equates to £67000 in lost sales and £8739 in lost VAT revenue at 15%.

Therefore the VAT cut, in getting people out to the shops, has reduced the rate at which VAT revenue was dropping. Paradoxically, more revenue would have been lost if nothing was done. Cameron's belief that a VAT cut results in a straightforward loss of revenue assumes that sales will be the same or more than last year. But it is self-evident that in a downturn sales drop. The question then becomes, how do we slow down this trend or reverse it.

People can deride the VAT cut as "too small" and a "gimmick", but anything the government can do to support economic activity, helps. Do-Nothing Cameron would have seen his tax revenue drop faster and his borrowing increase quicker than Do Something Darling.

As to why the VAT cuts work - people are programmed to just like tax-cuts, it seems to stimulate a different pleasure centre in their brains than mere discounts. And half the time they arn't being rational or logical about it. John Lewis was surprised - "Nat Wakely, director of selling operations at John Lewis, said there had been clear evidence that consumers were holding back on more expensive items until the cut in VAT spending was passed on 10 days ago - although he admitted it was "slightly curious" because the 2.5 point cut announced in the pre-budget report had appeared to be too little to make a difference". But then it is the Conservative party that has trained the general public to act like pavlovian dogs to tax cuts these last thirty years. Curious that they now no longer believe in what they themselves have wrought!


Anonymous said...

So one store group says their sales based on a single week are up so that proves the VAT cut is working,get a grip of yourself.

Common sense would tell you that when prices are being discounted by upto 50% a further piddling reduction of 2.1% makes absolutely no difference.

Even the French rejected a VAT reduction.

Danivon said...

One thing I've noticed is that when the VAT cut is passed on at the till, people do a double take and then smile - it may only be 2% of the price, but they are getting money off what they thought was the price, even in a sale.

That warm feeling improves confidence, and might be making people more relaxed about buying things. I also think that people have been holding back until nearer Christmas, because they know prices are going down - but they have to but those pressies soon.

The real test will be after Xmas, when we will probably see either a rush for bargains in January Sales or a collective belt-tightening.

Personally I think that a VAT cut is not the only spur that should have been used. A large increase in the basic income tax allowance would have been far more useful (although would have cost more in the short term and so have been a bigger gamble)

Dungeekin said...

Our pockets were bare,
We'd no money to play,
No food in the house,
and our mortgage to pay.

I sat there with Sally,
We sat there, we two,
and I said "how I wish
That we had voted Blue!"

To poor to go out,
Business gone to the wall,
So we sat in the house,
And did nothing at all.

And then. . . something went 'Bump'!
How that bump made us jump!

We looked - and we saw him step in on our mat!
We looked and we saw him!
The Prat who cut VAT!
And he said to us "why do you sit there like that"?

"I know that right now,
There's a shortage of money,
But we can have lots of good fun,
Because the UK's in a position of strength to weather the global economic downturn, with low debt and solid investment following the prudent actions of this Labour Government which has introduced a fair economic system and ensured reasonable taxation and eleventy-million Quarters of unprecedented economic growth and banished boom and bust and so you can do things which are funny!"

"I know some good games we could play",
Said the Prat.
"I know some new tricks",
Said the Prat who cut VAT.
"A lot of good tricks,
I will show them to you,
And never again will you.
Want to vote Blue".

"Look at me! Look at me now!" said the Prat,
"With a mountain of debt,
On the top of my hat!
I can prop up the Banks,
I can borrow some more,
I can offset your interest,
Give tax breaks to all!
I can give cash to Iceland,
While tax receipts fall!
And look! I can tell everybody I care,
As I generate borrowing out of thin air!"

And then he ran out
And then, fast as a fox,
The Prat who cut VAT
Came back in with a box.
A big red wood box,
It was shut with a hook
"Now look at this trick",
Said the Prat. "Take a look!"

"I will pick up the hook.
You will see something new.
Two things. And I call them
Thing One and Thing Two.
These Things will not bite you.
They want to have fun."
Then, out of the box
Came Thing Two and Thing One!
And they ran to us fast.
They said, "How do you do?
Would you like to shake hands
With Thing One and Thing Two?"

Thing Two and Thing One!
They messed up! They briefed down!
They made masses of laws
To tie all of us down!
They brought in ID cards,
Arrested MPs,
And they spent yet more money,
On each awful wheeze!

Then I cast out my Vote.
It came down with a PLOP!
And I had them! At last!
All these Things had to stop.
Then I said to the Prat,
"Now you do as I say.
You and Gordon pack up
And you go far away!"

"Oh dear!" said the Prat,
"You have worked out our game
Oh dear.
What a shame!
What a shame!
What a shame!"

Then he shut up the Things
In the box with the hook.
And the Prat went away
With a sad kind of look.

And Sally and I did not know
What to say.
Now the Prat who cut VAT
Had pissed the money away

We had voted about it,
But what could THEY do?
Our country is screwed
If we don't all Vote Blue.

snowflake5 said...

Danivon- you are correct - this is the first tax-cut that is visible to the public, in the same way petrol prices are visible. Regarding increasing the personal allowance, I think it was considered, but when the american version bombed, it was ditched. No good giving people money to hoard - businesses (and thus jobs) disappear if people don't conduct normal commercial transactions.

Dungeekin - I congratulate you on taking the time to compose a poem. You must be feeling so proud of yourself for being among the first Tories in a generation to oppose a cut in tax.

Anonymous said...

I guess in terms of the sheer carnage that Brown has inflicted on our economy,he easily surpasses Lamont as the worst post war Chancellor.
This accolade can be added to his worst poll ratings of any modern prime minister,quite some landmarks he's achieving.

snowflake5 said...

broncodelsey - not sure what on earth you are talking about - the latest polls show that people not only trust Brown to lead them during this world crisis, but that they think Brown is more honest than Cameron (though that one is self-evident)

RantinRab said...

Is your blog for real? Who are you trying to convince with all the bullshit spin? Yourself? May I recommend old holborns' blog for a peak into the real world.

RantinRab said...

Comment moderation? What a shock. Fuckwit.

snowflake5 said...

Rab C. Nesbitt - swearing is usually a sign of deep frustration. Have been seeing a lot of that from Tories lately, I wonde why? :-)