Monday, 24 November 2008

Does a cut in VAT mean a cut in prices?

It's been widely leaked in the press that the Chancellor, Alistair Darling, will this afternoon announce a cut in VAT (Value Added Tax) from 17.5% to 15% (apparently the lowest it is allowed to go under EU rules). The idea is to stimulate the economy by reducing prices in the shops and get shoppers spending again.

Only, I don't think it will do either of those things.

First off, there is no guarantee that shops will actually cut their prices. Food, children's clothes and a few other things aren't affected anyway, but if you were a shopkeeper selling, say, televisions, would you change all your price tags, literature and website to cut the price of a £499 TV to £488? I don't think I would. I'd say thanks to the government, carry on charging £499 and pocket the £11 difference for myself.

And even if the shopkeepers are generous and pass on the cut, will eleven quid of a £500 item really make people rush out and buy it? Let's face it, the shops have been cutting prices by 20% or more in the past few weeks and even that hasn't stimulated sales. If a hundred quid reduction isn't making people buy that TV, why would £11 off?

From a personal standpoint, I'd rather have a cut in income tax if there has to be a cut at all. It's something real that I'll actually see in my pay packet and it'll make me feel better about things. Falling prices in the shops will just make me think things are getting worse, not better.

So how about a 1p in the pound cut in income tax and a reduction in National Insurance too (income tax in all but name). It might only put and extra few quid in my bank - but I'll feel better for it.

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