A VAT holiday might amount to no more than a gigantic headache for retailers - only time will tell - but Darling's income tax move does not go far enough.
So the much-vaunted Pre-Budget Report shaped up pretty much as expected. Economic projections were significantly downgraded and out came a set of measures aimed at pulling us out of recession by summer 2009. The Chancellor announced a temporary cut in VAT - from 17.5% to 15% (the lowest allowed under European Law).
Once again, this is a measure designed to get us spending our hard earned cash in an attempt to kick start the economy rather than let it fall into a longer, deeper and more painful recession. But will it work? Well, the timing couldn’t be worse. If retailers are to pass on the cut across the board, then they will have to navigate the logistical nightmare of adjusting millions of barcodes and replacing price labelling at what they hope will be the busiest time of the year. Some estimates put the cost of dealing with the change in VAT at £300m – ouch.
Even so, the biggest retailers, including Tesco, John Lewis, Marks & Spencer and Dixons are committed to passing on the rate cut in full, by Monday. In fact Tesco and John Lewis have announced plans to pass on the cut early, along with a raft of price cuts, in the hope of stealing a march on competitors. But don’t expect every price to come down. It’s more likely that many retailers will use the cut to fund promotions on selected items, to encourage people to visit the store in the first place.
So it seems that the cut will have an effect on prices, but will it encourage more people to spend this Christmas? It’s very hard to say. It can’t hurt, but given that many retailers are already cutting prices by up to 20%, another 2.5% seems like a drop in the ocean. That sense is re-enforced by the early public response – it seems that most shoppers surveyed by The Guardian were unimpressed: "Even on expensive goods like cars or computers, where you will get quite a few pounds off, it's not going to have much effect. If you're planning to spend that sort of money - and I'm not - you either can or you can't. Knocking £200 off a car or £20 off a computer won't change people's plans."
It’s hard to argue with that, but we’ll only see the true reaction once the Christmas panic buying starts. Personally, I was rather more impressed with plans for a 45p tax band for those earning over £150,000 per year. Maybe we have finally realised that the trickle-down theory doesn’t work. A tax system that allows the rich to get richer in the belief that the rest will benefit is patently garbage. The rich have got richer, a lot richer, but those earning over £150,000 still account for just 1% of the population and half of children in the UK still live in poverty (that’s around 3.9 million).
I say maybe because the Shadow Chancellor won’t agree, and it remains to be seen whether the next government will have either the nerve or the inclination to truly create a fair tax system. But wouldn’t it be refreshing to see the next General Election fought out by parties with radically different outlooks – one determined to create a fairer society and the other determined maintain the status quo? Don’t hold your breath though.
