Estimates suggest such a VAT cut would save the average household more than £1,300 a year, while the Institute for Fiscal Studies said it would cost taxpayers £3.2bn a month, or £38bn for a year.
Mr Brown announced a year-long cut in VAT from 17.5% to 15% in December 2008 in response to the financial crisis.
Other possibilities being considered by Ms Truss include extending the 5p cut in fuel duty beyond March, and resuming help for businesses that was seen during the worst of the COVID-19 pandemic, such as a larger reduction in VAT for hospitality, tourism and agriculture. Ms Truss’s team is also considering lifting the personal tax-free allowance, raising the point at which people pay the 40% rate of tax, and cutting the basic tax rate below 20%.
In the short-term, cutting taxes won’t pay the bills …
I’m guessing the theory is that it will reduce the cost of inputs for business, but that won’t save households who don’t have disposable incomes and it will reduce available investment funds for much-needed services. There are no easy solutions.
I couldn’t see how a cut in VAT would help in this current situation.
I am not that knowledgeable about political economics but I found an article which explained some of the downsides of a cut in VAT in the present situation.
A VAT cut is a broad-based stimulus – the equivalent of sending a cheque to everyone in proportion to how they shop, roughly speaking. Just because it manifests as prices being lower than otherwise does not change this. And the message of high inflation is that the economy does not cry out for more stimulus. Demand has been outmatching supply. If this was only about energy prices, then the Bank of England might be more relaxed – and the government could restrict its response to the energy sector alone. But OECD figures show that around two-thirds of items in the CPI basket are rising in price at over 4% a year. A further fifth are rising at over 2.5%. Meanwhile, the labour market is as tight as it has been this century, in terms of the numbers of workers available for each job vacancy.
Stimulus is not an answer to inflation, no matter where it ends up. Moreover, businesses struggling to find the staff or pay their bills are less likely to pass on a VAT windfall than they would during times of low demand, such as when VAT was (correctly) cut in 2009. This is just one reason that the inflation-cutting attractions of a VAT cut are not that great either. Another is that when the headline figure is likely to hit double figures, it is fanciful to think wage demands will be substantially moderated by a slight change in the number. The difference between 2% and 4% inflation is much more noticeable than between 8 and 10.
For some. Those who earn a lot and who have high disposable income and thus buy lots of stuff which are VAT payable.
But imagine if you’re a good salary of £40k - significantly above average. Your income tax bill is about £5.5k. So even a large drop in the income tax rate won’t cover the hike in energy costs. And on £40k you are likely to be buying things that are VAT payable, but not tens of thousands of pounds a year of these items. So a drop from 20% to 15% only means saving 5% which works out at £500 per ten thousand pound spent. Again, not exactly addressing the hike in costs elsewhere.
So I’m very unconvinced that cutting tax will stimulate spending. People might be grateful that there is a small contribution towards their energy bill but they will still defer those major purchases.
@Dextrous63 , More money in OUR pocket !!
But less in governments pockets to pay for NHS , Civil service pensions
and student loans!!
Catch 22 comes to mind ?
The benefits of deficit econmics are manifest !?!?
I mentioned yesterday that someone, somewhere is taking the pi$$. Prices for energy have gone through the roof, which is partly why things have started to go completely bonkers now. I’m aware it isn’t all as simple as that, but it’s a good enough a simplistic precis for the time being.
In time, I hope that what goes round comes round to those who are extracting the urine now.
@swimfeeders , My money wont be going on energy Swimmy !!
I intend to use only the bare minimum of electricity and no gas at all!
I calculate l can keep my bills to nearly the same level as pre crisis prices !
My direct debit willl be cancelled after this bank holiday monday when the
bank opens again !
I am doing this not to be bolshi but of neccessity !
I will not allow my small savings to be stolen ??
Donkeyman, If you stick to that decision then you are going to be the richest man in the graveyard!
The way l see it is, we are all in the same boat. We can either lump it, or leave it, or start a revolution… but for now we are well and truly snookered whatever way we go.
Art, you’ll have to wait until he gets back onto his bike on the trainer stand and starts pedalling for long enough for that old 1970s dynamo he bought off eBay to generate enough electrickery to get back online.
