So, the government may be looking to reduce VAT by 2.5% to the lowest allowable by the EU (15%), or so BBC News informs me. They claim that in doing so they’ll encourage people to spend more, boosting the encomy and hopeully helping us reduce the affects of any recession; but will it have the desired impact.
While this might sound good to start with there are a few things to consider. As the article points out, we’re likely to have to put up with increased taxes in the long run to compensate for the lost revenue, and we’re probably going to have to increase our national debt in order to cover for it in the short term if we want to maintain the level of funding for services.
There’s also the problem that people might now wait for the reduction to kick in before they’re willing to part with money, although Christmas will likely force people to spend anyway. This of course has the problem of decreasing spending further while people wait for the reduction to roll round and will therefore damage the economy more in the immediate future.
Finally there’s the cynic in me saying that the consumers might not see much of this decrease. Pretty much all the prices in shops are with VAT included, so people don’t really know how much of that is VAT, and therefore the savings that get passed on (if any) could easily be less than they should be. This will lead to companies making more money, which I suppose is possibly a good thing if we want to boost the economy, but is bad for the consumer whichever way you look at it.
Whatever happens it’ll be interesting to see how this pans out.