Osborne's Vampire VAT?
Osborne's vampire VAT?
Is the much-discussed increase in VAT really going to damage the economy and the retail industry in particular? Peter Burgess provides his two penneth.
Unless you have been living in another galaxy these last few weeks you will have become aware that VAT rose from 17.5% to 20% on January 4th. So will an apparently measly 2.5% on purchases really make much difference? Well let's start with the government's coffers first. VAT is one of the most efficient ways governments raise money. You cannot go offshore to escape paying it and where there is tax avoidance it's usually at quite a petty/small-scale level - I refer of course to the 'cash in hand' payments people might make their builder, plumber or decorator, etc.
It is estimated that this increase in VAT is going to generate for HMG another £13 billion in revenues in 2011. That the Government needs this money is beyond doubt. Other than a few lunatic unions just about everyone knows that there is a black hole in public finances that has to be filled. The debate is about how quickly this should be done. More of that later.
So will this tax rise damage the economy as a whole? The short answer is yes. Any tax rise in our over-taxed economy which is struggling to free itself from the clutches of recession is damaging. The most consistent argument in favour of the VAT increase is, however, that the funds need to be raised somehow and if not from this measure then where? In effect the VAT rise is what is deemed the least worst option.
The last thing the economy needs now is for people to stop spending. If that does happen then we may well see either a double-dip recession or perhaps a red-faced coalition reversing the policy. That however seems unlikely.
Retailers and the hospitality trades are amongst the most efficient industries in the UK and are undoubtedly amongst the most efficient in the world. This VAT rise will have a very much phased approach. Shop managers amongst you will have seen certain lines rise in price but across huge sections of your ranges you will notice that the increase has just been absorbed. This means that it is the retailer that is taking the hit and not the consumer. The Government knew this of course and it should consider itself highly indebted to our industries for saving its skin on this one. How sustainable this is in the long-term remains a matter of some debate.
However, it should also be noted that VAT does not apply to a large number of products; children's clothes, food, insurance, passenger fares are all exempt. VAT registered companies can claim back the VAT on the goods and services they procure for the business. In fact, over £80 billion of VAT is charged, but only £13 billion ends up in the treasury.
So all in all I expect the economy and the ever-patient British public to accept this increase with its usual stoicism and carry on spending. However there will be pain. For retailers who sell large ticket items that 2.5% will make a difference. For retailers with slower moving items such as shoes, furniture and some clothing items this will hurt in the short term. In effect they have been hit with a one-off tax which seems to be a punishment for doing their job well.
Motorists will be squeezed once again at the petrol pump, with many people looking around for a large pinch of salt with which to take Government promises to look into a fuel duty stabiliser.
But like I said, you cannot take £13 billion out of the economy and not expect some sort of reaction but I am cautiously optimistic that we will get through it. Vulnerable retailers and hospitality providers may find that this latest hit is the straw that breaks the camel's back. But I do not expect to see the Armageddon that has predicted by the Government's opponents.
This brings me finally to whether or not this is the right thing to do. If my editor allows this to go into print [I'm all for freedom of the press! Ed.] then here it is:
The alternative to this tax hike being proffered by the opposition was to increase employers' National Insurance contributions. This would have been quite wrong. It is highly populist to pitch this as a tax on employers and therefore implying the ordinary folk don't pay. It is also naïve. An increase in the tax employers pay for employing people at a time of rising unemployment was nonsensical. I fear this suggestion had more to do with internal Labour Party machinations than economics for we now know that Alastair Darling wanted to raise VAT rather than Employers' NI. To raise income tax further would have also hit the poorest harder because the illusion that you can keep taxing the rich doesn't work. They're too clever and move offshore to avoid paying it at all. Which does rather only leave VAT.
That said there are two things very wrong with this hike. I think people understand there is something of an emergency going on and something has to be done. But you will notice that there has been no mention of this tax rise being reversed when the crisis is over. This just seems unfair. Secondly it's a pity that the Government could not have been more creative. Certain items could have had a more severe increase in tax (alcohol for one) whilst other areas could have been protected.
However no one has ever accused George Osborne of being creative so we are stuck with what we have got. All in all I am optimistic for a slow but sustained recovery during 2011. But there will still be pain and there will be casualties.