A few weeks ago, in the wake of Ed Balls’ call for a VAT cut, I had a lively exchange on my Twitter page with followers about how taxation policy could be used to stimulate the UK economy. One person suggested that a VAT cut would do the trick as everyone would benefit from it, including pensioners and people on fixed incomes.
This was in contrast to fiddling with income tax rates, for example, which would only affect a certain percentage of the UK population (probably higher earners). But I disagree with implementing a VAT cut as I believe it is important for people to feel that they really have more money in their pockets to spend. Also, there is no VAT on food or mortgage interest or rent or train travel, which consume a large part of most people’s household budgets. If I take my own monthly household expenditure, for example, at least two-thirds of it is probably exempt from VAT. Also, as a tax on consumables, VAT is essentially a tax of choice, but income tax is a tax of no choice. Even more significantly, perhaps, is the fact that although the government might cut VAT, it doesn’t necessarily mean that retailers will reflect this in their prices.
When Alistair Darling cut VAT to 15% in 2009, some retailers, Marks & Spencer for example, clearly passed on the saving to customers and reduced their prices – but many other retailers and suppliers of consumer goods, particularly smaller companies, did not. They kept the saving for themselves. So while a VAT cut might benefit ailing small businesses, as far as the great British public is concerned I think it would be a complete waste of time. And money.