Shops should cut Vat now
Eager retailers would have introduced the Vat cut immediately – not complained about having only a week to work out how to do it. Don’t they know a sales aid when they see one?
OK, the tax cut only reduces prices by 2.1 per cent, but you can bet that if the chancellor had announced a similar size increase in Vat they would be wailing like anything about the massive increase and the effect on demand.
But if the size of the cut is small, the window posters advertising it need not be. For the crucial run-up to Christmas they can offer “Vat cuts” to entice shoppers to open their purses.
And for the week between the Pre-Budget Report and the start of the lower Vat regime, an enterprising retailer could have slashed its prices by the equivalent of the 2.5 per cent tax cut simply by reducing the prices of all Vat-able items by 2.1 per cent at the till.
There would be no need to re-ticket all items of stock, simply to stick signs around the stores saying all purchases will have the Vat reduction applied on payment. Many stores already operate “Blue Cross” days on the same principle.
The reduction would have come from profit margins, but it is less than the 20 per cent discounts being offered arbitrarily to generate sales. And there would be a brand boost to those stores that cut prices without waiting for the chancellor’s start date.
Don’t forget, when petrol or cigarette or booze duties are changed in a budget the shops and garages implement them next morning. Why are other retailers complaining when they have a week’s notice?
And if retailers keep complaining that the cut is too small to stimulate demand their customers may just agree. They should be boasting about any cut they can make without quibbling about the size.
Whether it works in saving the economy will partly be a test of the elasticity of demand for Vat-able goods but cutting a spending tax rather than income taxes has many virtues.
First, the cut comes through only if people spend, whereas an income tax cut could go into debt-repayment or savings. Secondly, each £2.50 government stimulus requires the consumer to spend £115 to receive it: the boost to consumer spending is thus 46-times as great as the public cost whereas a £1 income tax cut generates only £1 of spending at the most.
And because the rich spend more on Vat-able goods than the poor, it is the well-off who will provide the greatest consumer boost. The Vat reduction thus transfers wealth from well-paid bankers to shop-assistants who might otherwise lose their jobs. Given that the well-off will pay for the Vat cut through higher income tax, that might seem fair.
And Darling’s 13-month lower Vat window includes two crucial Christmas periods if the retailers get their act together in time for the first.
By the end of 2009 the window posters should be saying “Rush to be tax rise”. Big ticket items from TVs to cars should benefit during 2009.
And just in case the Vat rate does rise to 18.5 per cent in 2011, as the chancellor considered but rejected, then the temporary cut is all the more valuable.
November 29th, 2008 at 4:13 pm
Come on, the VAT cut is fiddling at the edges. I bought a new Apple laptop yesterday that has 8% lopped off as part of the company’s global ‘Black Friday’ sales. Whereas 2.5% is a rounding error. I also think it’s a pretty odd policy of the government to risk embedding deflation.
Boosting infrastructural investment to support the UK ‘mittlestrand’ and increasing the velocity of money supply would have been more useful, in my view.