VAT's another fine mess you got us into
As the UK creeps slowly out of recession, Peter Burgess takes a closer look at what impact the reduction in Value Added Tax actually had in stimulating the economy. Late last month, it was officially announced that the UK is finally out of recession. Albeit only just. There will doubtless be lots of back slapping and congratulations going on in Downing Street and Whitehall, but it has to be remembered that the UK was the last of the G20 to pull out of what has been the worst economic crisis since the '30s.
So, amongst all the other things the Government did to try and get our economy back on track, was the £12billion spent on this temporary cut in VAT really worth it?
The primary object of the exercise was to get our consumers back into the shops. Certainly, retail sales held up much better than expected through 2009. One cannot help but notice that the Daily Retail News seems to be full of good news stories every day at the moment, as opposed to the dark days of Winter 2008/9.
The cut in VAT was only one of a number of measures put in place by the Government to try and restore the economy's fortunes. It had the effect of putting £12 billion back into the economy. This needs to be offset against the £200 billion also put into the economy by Quantitative Easing (QE). All in all therefore, it was fairly small beer. At the time this cut was announced in November 2008, I have to say that I was aghast at the naivety of government. Almost every high street had sale posters with 50, 60 or in some cases 70% off, and that was before Christmas. Did those who govern us really think that a 2.5% discount was really going to get us flocking to the shops?
It was certainly an exercise in job creation. The marking down and then the remarking up of goods must have been a real nightmare for those of you in stores. Probably the most crass part of the whole exercise was ending it on 31st December, just as the sales were starting. Surely, if Alistair Darling had the faintest clue how retail works, he would have heeded the advice of Sir Stuart Rose and others to delay the return to 17.5% by at least two weeks. Alas, he did not.
Nevertheless £12 billion was put back into the economy that would not have otherwise of been there. That had to help. Where did that £12 billion go? Well, in fact most of it went towards the public paying back debt. After the horrors of the banking crisis the general public felt very nervous about the level of debt, resulting in record debt reduction during 2009. I remain firmly of the opinion that the public ignored the cut in VAT. The amount involved was so minimal in our everyday purchases that it would not have provided even the remotest incentive to buy. I cannot imagine that any of you readers rushed out to buy anything except perhaps cars before this increase took effect.
But there was a cost. The £12billion cost has been borrowed by the Government. We now have to pay this back with interest. So would we have all been better off if Mr Darling had left VAT as it was? Yes, almost certainly. But there were other things that would have been far more helpful.
There is no reason why you cannot have a dual rate of VAT. Indeed, we already do, as some things are zero-rated. To a large extent putting money back in taxpayers' pockets does suck in imports and assists in job creation in other countries; China, in particular.
There was (and still is) a way of targeting all of that money into the UK. Rather than reducing VAT across the board as was done, it could have been targeted on certain areas. Hospitality would have got my vote. The hospitality industry is the second largest employer in the UK after retail - and a very close second at that. The wealth and jobs that it creates are all here in the UK. For roughly the same amount of money, 10% could have been wiped off hotel and restaurant bills. That would have given a much needed boost to an industry that is labour intensive. Furthermore, it would have encouraged more of us to stay in the UK for our holidays and even more foreign tourists to come here and spend their money, not only in our hotels and restaurants, but also in our shops. With the £ being at such a low level this could have meant a real bonanza for the tourist industry, giving a huge boost to employment and probably recovering all of this cost in extra sales.
Sadly, whichever government gets in you may expect a further VAT rise to 20%. I understand the need for this as there is such a black hole in public finances that something must be done. The government of the day will say of course that this is a temporary measure; but does anyone believe that this tax will ever be reduced once it is levied?
We can only hope that the Government will recognise that hospitality and retail, already making up 20% of the workforce, are really the geese that lay the golden eggs and recognise that tourists, far from being a nuisance by clogging up the Tube, etc., are now more important than North Sea oil.
It's possible that those who govern us might. But don't hold your breath.