2.12765% off - or not.

[DVB Cornwall]

How many retailers are seriously going to reprice their stock to reflect the 2.12765% reduction in VATable goods prices assuming VAT is cut to 15% tomorrow?

I doubt it.

nb.
2.12765% = 2.5/117.5

[Gavin Scott]

I did it when I worked in my aunt and uncles business when we went from 15% to 17.5%. Every item by hand.

A good deal easier to change on the till when you use a barcode PLU system, but its still a lot of labels to change.

[Luke-H]

I know that Currys (and so by that logic, PC World aswell) are. We've got to reprint and replace thousands of price tickets tomorrow if it goes through.

[Nick Harvey]

How many retailers are seriously going to reprice their stock to reflect the 2.12765% reduction in VATable goods prices assuming VAT is cut to 15% tomorrow?

I have a feeling you're dead on there.

Another one of these "lots of publicity but very little action" policies in my view.

Yes, I can see Currys and such people having to move, where the difference is going to be £10 or more, but I very much doubt we'll see Morrisons rushing to reduce the Mars Bars.

It is another 2p a litre off petrol, though. Any guesses that he replaces that 2p with the delayed duty increase?

And for those having to do the 'backward calculation' for VAT forms, 20/23 isn't much easier to do than 40/47, so it's not going to make accounts departments any more efficient.

[marksi]

I suspect there will be a public campaign to name and shame any retailers who appear to be using it to add a couple of percent to their profits. It'll be obvious enough if prices are still either round numbers or £x.99.

You've got to wonder what the cost to the country of making that change will be in terms of man hours.

[Dr Lobster*]

whilst it should be applauded that the government is trying to do something to help the average family, i can't help but feel that lowering vat is actually going to do all that much.

lets face it, many food items, electricity, gas and so on aren't actually charged at the full 17.5% rate anyway, and many other essentials, such as clothes aren't sufficiently expensive that a 2.5 percent reduction in the vat element of the price will make them instantly desirable to the consumer, and if you're going to be buying a big ticket item like a new lcd tv, a £10 saving is hardly going to be the tipping point in making me rush out and spend.

wouldn't it have been a better idea if the government adjusted income tax thresholds to enable those on low and modest incomes (say up to £30,000) to keep more of their salary? an extra £100 in my wage packet a month might make me go out and spend, a saving of £1.50 on a pair of shoes or 7 pence on a packet of luxury biscuits probably won't.

[iSon]

whilst it should be applauded that the government is trying to do something to help the average family, i can't help but feel that lowering vat is actually going to do all that much.

lets face it, many food items, electricity, gas and so on aren't actually charged at the full 17.5% rate anyway, and many other essentials, such as clothes aren't sufficiently expensive that a 2.5 percent reduction in the vat element of the price will make them instantly desirable to the consumer, and if you're going to be buying a big ticket item like a new lcd tv, a £10 saving is hardly going to be the tipping point in making me rush out and spend.

wouldn't it have been a better idea if the government adjusted income tax thresholds to enable those on low and modest incomes (say up to £30,000) to keep more of their salary? an extra £100 in my wage packet a month might make me go out on spend, a saving of £1.50 on a pair of shoes or 7 pence on a packet of luxury biscuits probably won't.

Don't be rediculous! That would be FAR too sensible. I think BBC News were, sort of, through the back door trying to highlight that it won't make much difference with the fact that you'll save a fiver on paying fifty quid a month for 12 months. Great, another pint and that's it. Lucky us.

I'm out of work at the moment so ANY move to make the cost of living just that little bit cheaper is welcome. BUT looking to the longer term, when the "deep and lasting recession" begins to sink in next year, will the government be looking to raise VAT to 20% to help pay for public spending when no-one is spending once Christmas is over and the fact that many people will have taken a freeze in their pay because no employer is willing to offer any more money?

[Mr Q]

wouldn't it have been a better idea if the government adjusted income tax thresholds to enable those on low and modest incomes (say up to £30,000) to keep more of their salary? an extra £100 in my wage packet a month might make me go out and spend, a saving of £1.50 on a pair of shoes or 7 pence on a packet of luxury biscuits probably won't.

But the point is not to give people more money - what the government wants to do is encourage people to spend. Those two things might sound like the same thing, but there's a subtle difference. Remember, when you earn a dollar, you have a choice between spending and saving it. If people are given an income tax cut, and people then choose to save that money, it does nothing to help stimulate the economy now - which is the government's desired objective. Although some people would obviously spend more, the sense is here that the government might not be getting the biggest 'bang' for their (well... your) buck.

By contrast, if the price you have to pay for goods and services is now lower, that's not money you can save - you either purchase the good and pay less, or you don't purchase the good at all. So what's the impact? Well, some goods and services you would have bought anyway - so there's no net gain there (indeed, there's a net loss to the government with respect of lost tax revenue). Some goods and services you were never going to buy, in which case there's no change either (and the government doesn't lose tax revenue, since they don't collect VAT when you don't buy a good). But where you purchase goods and services that, at the margin, you wouldn't have bought in the absence of the tax cut, then in fact the government is better off (it's collecting tax revenue that it otherwise wouldn't have), and, of course, both consumers and producers are better off for the transaction taking place.

Still, for what appears to be a pretty meagre cut, there's going to be a huge amount of hassle for businesses associated with relabelling and repricing their stock. Businesses providing goods and services where demand isn't particularly responsive to changes in prices could face a net cost. I also think there's a fair chance, as some people are noting here, that some businesses which are concerned about the current economic climate might just use the VAT cut as a chance to raise prices (passing on only part or none of the tax cut). Moreover, given the current credit crisis, I don't think it's an entirely bad outcome if people choose to save more. Given the fiscal black hole the Brown government is facing, it'll probably prove to be less expensive than an income tax cut - but it's questionable whether on balance it will prove more effective.

[Stuart*]

Still, for what appears to be a pretty meagre cut, there's going to be a huge amount of hassle for businesses associated with relabelling and repricing their stock. Businesses providing goods and services where demand isn't particularly responsive to changes in prices could face a net cost. I also think there's a fair chance, as some people are noting here, that some businesses which are concerned about the current economic climate might just use the VAT cut as a chance to raise prices (passing on only part or none of the tax cut).

This cut in VAT, if it happens, will make for some sensational headlines; but I can’t help thinking that an extra £10 out of each £400 I spend on necessities is going to have me running for the shops to buy more goods. Furthermore, I agree with Mr Q that the cost of implementing the change by some businesses may force them to keep back some of the reduction.

Raising the tax threshold (again) would be a more instant remedy if people use the extra income to pay off debt, not spend it on more goods. It also affects the lowest paid the most, for obvious reasons. Increasing tax credits for those who aren’t working will be unpopular, and will be seen as ‘vote-buying’.

Moreover, given the current credit crisis, I don't think it's an entirely bad outcome if people choose to save more. Given the fiscal black hole the Brown government is facing, it'll probably prove to be less expensive than an income tax cut - but it's questionable whether on balance it will prove more effective.

I don’t think anyone is actually encouraged to save in the current climate. Interest rates are rumoured to be dropping to zero, or only slightly above on saving accounts; of course that’s where a lot of the investment for business is generated. Last year my sister and brother-in-law were persuaded to invest money from the sale of his land by a High Street bank; that money is now ‘trapped’ as they lose almost 30% of the value if they withdraw it to live on. They’d have been better off keeping it in a suitcase under the bed!

I’m not sure whether the policy of ‘borrow and tax later’ is going to shorten the recession. Many people have built up unsustainable credit recently. During the recessions of the 80s and early 90s debt was almost wiped-out by annual inflation rates (and pay rises) of 15%+. That effect won’t happen if inflation is kept artificially low (or even engineered as deflation).

We may all just about struggle through this recession, to then find most people have virtually the same debt at the end of it and it acts as a catalyst for another one!

I’m not an economist, but perhaps it’s preferable for a recession to run its course rather than try to interfere and make things worse. High inflation has normally been the ‘bad medicine’ to get out of a recession, are we just prolonging the inevitable?

[Mr Q]

I’m not sure whether the policy of ‘borrow and tax later’ is going to shorten the recession. Many people have built up unsustainable credit recently. During the recessions of the 80s and early 90s debt was almost wiped-out by annual inflation rates (and pay rises) of 15%+. That effect won’t happen if inflation is kept artificially low (or even engineered as deflation).

I don't think anyone is keeping inflation 'artificially' low, and I think the Bank of England - much like central bankers around the world - are doing their utmost to avoid deflation, which would be disastrous. Japan is still struggling with the after-effects of a decade-long deflationary period (which might yet return to them as they sink back into recession).

You also need to consider the impact of interest rates on debt: most debt is not simply a fixed nominal amount that you have to repay, but will likely include some provision for interest. If inflation is high, under current policy settings interest rates will be high as well - hence the total amount you have to repay will increase. Some debt might even be indexed to the inflation rate - thus relative price (and wage) changes over time offer absolutely no relief. To this end, lower interest rates (as currently being pursued) should notionally have the effect of relieving the debt burden on households and businesses.

I’m not an economist, but perhaps it’s preferable for a recession to run its course rather than try to interfere and make things worse. High inflation has normally been the ‘bad medicine’ to get out of a recession, are we just prolonging the inevitable?

I don't think high inflation has ever helped a country out of a recession - high inflation is more likely to cause a recession in the first place. That's precisely why many central banks (including the Bank of England, though interestingly not the US Federal Reserve) have a target for inflation.

The problem with inflation is that if people expect it, it just becomes entrenched. Inflation begets further inflation. Think about it this way: if you expect that prices are going to increase by 5% in the next year, you're going to push for a 5% increase in your wages, otherwise you're going to be worse off in real terms. That however has the effect of increasing the production costs for firms - which they then promptly pass on to their consumers in the form of higher prices. Prices will therefore increase by more than 5%, which means you will once again demand further wage increases, which cause further price increases, and so on. It is a vicious and unproductive spiral.

[Stuart*]

I don't think high inflation has ever helped a country out of a recession - high inflation is more likely to cause a recession in the first place. That's precisely why many central banks (including the Bank of England, though interestingly not the US Federal Reserve) have a target for inflation.

Perhaps that’s the solution for you and me, but certainly not the preferred option of central or private banks, for the reasons I stated. They effectively lose the value of their assets, rapidly.

However, Governments have now effectively underwritten all debts. It saves the banks, temporarily, but doesn’t solve the debt problem; it’s simply transfers it to a long-term lender. You and I?

The problem with inflation is that if people expect it, it just becomes entrenched. Inflation begets further inflation. Think about it this way: if you expect that prices are going to increase by 5% in the next year, you're going to push for a 5% increase in your wages, otherwise you're going to be worse off in real terms. That however has the effect of increasing the production costs for firms - which they then promptly pass on to their consumers in the form of higher prices. Prices will therefore increase by more than 5%, which means you will once again demand further wage increases, which cause further price increases, and so on. It is a vicious and unproductive spiral.

I concur, in part, and the production costs will increase for a while. But loans and mortgages (which represent the largest cost to many ordinary people) will reduce in ‘real terms’. That would generate increased wealth (disposable income).

Rapid repayment of loans/debts would hopefully follow and a return to an economy where people could spend what they earned, perhaps? That is the boost for the economy.

If that took place, then I believe what *must* follow is a severe government-led restriction on personal borrowing to prevent the same situation happening again. Regulation, if not the permanent partial state ownership of banks is the answer, perhaps?
(My God, I'll be waving a red flag in a minute. Which isn't my intention, my Dad would kill me if he could see me saying that using his electricity!)

I don’t want Monday’s PBR to be the start of a government funded hiatus on the recession which will eventually plunge the UK into a 10 year depression after the 2010 election.

I don’t like Mr Brown as a politician, I never have for some reason, but I have to grit my teeth at the fact that he seems to have more ideas than the opposition at the moment. I expected more suggestions to be brought forward by the opposition parties; the only other person talking sensibly appears to be Vince Cable from the LibDems, but he's hardly ever going to be Chancellor, is he?