A reader has sent this list of reasons why cutting VAT may not be the best way to boost the economy...
1. Deflationary for the next 12 months
2. Reduces business liquidity possibly by over £1bn
3. Little or no help to SME’s in the B2B sector
4. Helps lower income individuals/families proportionately less than higher ones
5. Gives businesses / retailers abilities to mark up price changes eg 70p chocolate bar is now 68.52p
6. Reduces the price of cigarettes probably first time in 20+ years
7. Reduces alcohol prices – possibly encouragement to binge drinking
8. Involves re-priceing by virtually all retailers at their busiest time of the year (supermarkets & garages can cope easily – others less so eg restaurants)
9. Reduces restaurant/ hairdressers etc tip income Lower paid impact again
10. Requires HMC&E to recalculate Flat rate VAT scheme rates & notify SME’s – initial confusion
11. Reversal to recover lost income requires possibly an increase of 33.3% in VAT rate
12. Reversal of rate increase will slow recovery
13. Optional increase in Income Tax personal allowance could have given 75% benefit immediately ie December/ January wheras VAT benefit spread over 12 months
14. Doesn’t reduce food prices – idea why not negative VAT rate!
15. Doesn’t significantly help housing market – critical
When I first heard about this yesterday evening, the following thoughts came to me...
* If I was running a shop, would I definitely pass on a 2.5 reduction in a VAT? Would I reduce a 99p product to 97p?
* For people at the lower end of the income scale, this will have marginal impact. A high proportion of their spending is on non VATable items or utility bills, where VAT is 5%
* Surely a fiscal stimulus works best when money is put directly into people's pockets and they can go out and spend it?
* What goes down, must surely then go up - and go up by more than the reduction in order to pay for the cost of borrowing that money. Is Robert Peston right when he predicts a new VAT rate of 22.5% within a couple of years?
These are the areas where the Conservatives should concentrate their attacks. I expect the government to obfuscate about how all these tax cuts will be paid for in the medium to long term. I doubt very much whether they have even thought about it. It's a real opportunity for the Tories to expose the government's sham of an economic policy.
So, can anyone expand this list of 15?
UPDATE: More from John Redwood.