Sunday, November 23, 2008

VAT cut to 15% but will it work?

The broadsheets today are filled with "speculation" that VAT will be cut to 15%, the lowest that being in the EU allows.

Of course were this true, any chancellor with honour would resign, but then new Labour chancellors have been leaking budget information since 1997 and have no honour so don't expect that.

However moving on the the substantive point. Will it work?


Well, what it may do is drive up consumer spending, mostly on imports, but only for a while. It will be a bit like waking up in the morning with a massive hangover then having a large glass of whiskey to get drunk again. That may get you over the hangover for a bit, but you still have to get over the hangover.

The hangover here of course is massive debt. Consumer debt has tripled under New Labour, with our banks lending £700 billion more in loans than they had in deposits. That deficit is a massive problem.

On top of this government is borrowing hand over fist in some kind of weird attempt to have a bit of a sobering drink. It won't work.

The fact is that we have a millstone of debt that has funded an asset boom around our necks. This will need to be paid off and this will take an age. During that time we will face lower growth than we otherwise would have done.

The Times on Sunday have this, The Observer has this, the Telegraph has this, the BBC has this and the Spectator Coffee House blog has this.

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