Vat rise could go unnoticed
If the Vat cut was a damp squib, how come restoring the rate 13 months later threatens the economic recovery? Our retailers should learn to stop screaming.
The reduction from 17.5 per cent to 15 per cent announced in November 2008 certainly was not large by the standards of other discounts available on the high street. It cut prices by just 2.1 per cent and retailers were quick to complain that its impact on sales would be small and the complexity of re-pricing goods and tills large.
Now they complain that reverting Vat to 17.5 per cent in January 2010 will not only repeat that complexity but risks ruining the country’s recovery. Well, the less they shout, the less damage this small price increase will produce.
The nation’s shopkeepers may have failed to grasp the marketing benefit of publicising the tax reduction when it came in and equally failed to exploit the “buy now before taxes rise” opportunity to boost Christmas sales before the tax rises. But to complain too loudly is effectively to put day-glo posters in their windows in January and adverts on TV saying “taxes up, don’t buy now”.
Shops publicise price cuts and keep quiet when they end them or raise prices: they should do the same with taxes. Luckily, the VAT tax increase comes in the low sales period after Christmas and will be disguised by price cuts in the January sales.
The Vat cut was budgeted to cost £12bn but the economic effect is hard to estimate: we will never know what retail sales would have done during 2009 if the rate had been unchanged. But there is evidence that sales of cars were not only boosted by the scrappage scheme but brought forward into 2009 to benefit from the Vat cut as well. On a £10,000 car, the saving of £210 is worth having.
But now that Vat has been moved twice in a short period – once down, once up - the effect of changing and the elasticity of demand should be studied by business. There remains the strong chance that an increase in the basic rate to at least 20 per cent is on the cards from a chancellor who has to balance the nation’s books and reduce outstanding debt. The UK’s 17.5 per cent rate is lower than many other nations’ sales taxes and anyone who thinks a large hike would be impossible should remember when the UK rate was just 10 per cent.
