Tuesday, November 25, 2008

VAT cut wont work and wont help the poor

Alistair Darling's pre budget report is out and it is nothing of the sort it is an emergency budget as the debt bubble comes home to roost.

The VAT cut wont work in that it will not sufficiently boost spending.

It crucially will do very little for middle and low income earners whose budgets are already stretched as they already have little spare to spend on items on which you pay VAT that has not also been clawed back in duty raises.

Consider the average family budget. What is it spent on at the moment and why is it squeezed? Well lets look at the top items.

  1. Housing costs (rent or mortgage) no VAT.
  2. Food. Mostly no VAT (Special cases luxury foods such as biscuits not essential ones like cakes, go figure.)
  3. Gas and electricity. No VAT reduction as VAT is only charged at 5%.
  4. Transport costs. Fuel VAT cuts will be made up for by increases in duty.
  5. Beer, wine and cigarettes. All VAT reductions to be more than clawed back.
So there you have it. Any presents most of us can buy this Christmas will be priced at something like £9.99, or some variant there of. Can you imagine that dropping to £9.77? No, me neither. (That said all praise to those retailers who do use those sort of numbers o show they are doing there bit!)

What is more as massive shop discounts have not brought about nirvana what will a paltry discount do?

Now, what will help. Well when lower household gas and electric bills turn up they will relieve the pressure on hard pressed households and may even make them feel good. Rises in tax credits will help for those who claim them as well.

All in all it would have made much more sense to cut income tax though.

The BBC has this.

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