But will a 2.5 percentage point cut in VAT make any difference to people’s spending decisions? right now. Nick Clegg, the Liberal Democrat leader asks will a modest price cut persuade the consumer to buy a flat screen TV? Or many other products for that matter.
At a time when retailers are slashing prices by 20% and more to stimulate sales can a 2% cut create a much needed “injection of spending”.
The Treasury figures suggest the cut is worth £3.8bn in the current financial year, perhaps worth around £1.5bn in December. It doesn’t sound like much “right now”.
David Smith Economics Editor of the Sunday Times, argues, “the effect of the VAT cut, if there is one, is cumulative. Along with sharply falling inflation, it will mean, according to the Treasury, that real household disposable income growth stays positive next year, if only by 0.5% to 1%. That is still consistent, it believes, with a fall in consumer spending of 1% or more, and a rise in the saving ratio.”
This may well be but with low levels of housing activity, housing equity withdrawal, worth some 5.7% and 4.6% of post tax income in 2006 and 2007 will be very low into 2009.
Rising unemployment, falling house prices, credit restrictions, the spectre of higher taxes and NI payments in the near term will inhibit consumer expenditure. Lower interest rates will help and along with the VAT reduction is welcome. But can it be enough to see a quick bounce back in the economy in the second half of 2009, let alone right now?
At a time when retailers are slashing prices by 20% and more to stimulate sales can a 2% cut create a much needed “injection of spending”.
The Treasury figures suggest the cut is worth £3.8bn in the current financial year, perhaps worth around £1.5bn in December. It doesn’t sound like much “right now”.
David Smith Economics Editor of the Sunday Times, argues, “the effect of the VAT cut, if there is one, is cumulative. Along with sharply falling inflation, it will mean, according to the Treasury, that real household disposable income growth stays positive next year, if only by 0.5% to 1%. That is still consistent, it believes, with a fall in consumer spending of 1% or more, and a rise in the saving ratio.”
This may well be but with low levels of housing activity, housing equity withdrawal, worth some 5.7% and 4.6% of post tax income in 2006 and 2007 will be very low into 2009.
Rising unemployment, falling house prices, credit restrictions, the spectre of higher taxes and NI payments in the near term will inhibit consumer expenditure. Lower interest rates will help and along with the VAT reduction is welcome. But can it be enough to see a quick bounce back in the economy in the second half of 2009, let alone right now?
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