Saturday, 2 July 2022

Giving with one hand?

Yesterday, it was reported that the government were considering a temporary cut in the standard rate of VAT from 20% to 17½% to provide some relief from the cost of living crisis. There’s much to be said for this both in reducing the pressure on household budgets and giving hard-pressed businesses a little financial headroom.

However, people need to be careful what they wish for. Something very similar was done in December 2008 as a response to the financial crisis, when the standard rate was reduced from the then 17½% to 15%. However, at the same time the rates of alcohol, tobacco and fuel duties were increased to offset the VAT cut, as it was felt that buyers of these “undesirable” products should not benefit. But when VAT was restored to 17½% in January 2010, the duties were not cut again, resulting in what was in effect a stealth increase.

If the same were to be repeated this time, it would represent a kick in the teeth for the hospitality trade and negate much of the benefit. At least it would probably be politically impossible to raise fuel duty when prices are at record levels, but the poor old smokers would no doubt end up being kicked in the wallet yet again.

If any such policy is announced, it will be very important to read the small print below the headline.

7 comments:

  1. Believers in sound money and fiscally responsible government would advocate higher VAT to improve the public finances.

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    Replies
    1. That must be Richard Murphy school of misguided economics thinking.

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    2. Putting the brakes on trade by increasing the cost of living even more is sound fiscal government? Riiiiiiight.

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    3. By all means tighten monetary policy - the Bank of England should have raised interest rates earlier and higher. But, going into what looks like a recession, increasing taxes really isn't a good idea.

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  2. They can't raise the rates, everything they're doing is mere window dressing, not worth a pin. That ship has sailed.

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    Replies
    1. I'd say it's odds-on that they will raise tobacco duty if they cut VAT.

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  3. Tobacco prices are now so high in the UK that most people i know buy from smugglers. Everyone knows someone who can supply. The Government backed by its health nazis got too greedy.

    ReplyDelete

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