VAT cut aims to boost economy
Christmas shopping will be cheaper this year thanks to a temporary 2.5% cut in VAT announced in the Pre-Budget Report, but purchasers of alcohol, cigarettes and fuel will not share in the savings.
A 13-month reduction in VAT from 17.5% to 15% announced by Chancellor Alistair Darling will come into effect on December 1 and cost the Treasury an estimated £12.5 billion.
But the Chancellor introduced separate increases in duties on drink, cigarettes, petrol and diesel which will offset the reduction, so they end up costing about the same. And the Treasury revealed that these duty hikes will remain in place after VAT returns to 17.5% at the beginning of 2010 - leaving drinkers and smokers paying 2.5% more in the long run.
The cut in VAT - which brings in £83bn to the Treasury in a normal year - forms part of a "fiscal stimulus" package designed to inject new vigour into Britain's economy. Mr Darling hopes that by putting more money into consumers' pockets, he can encourage them to spend more and keep British shops and manufacturers in business.
But there are concerns over the cost to business of changing price tags and accountancy systems to take account of the change. A Treasury document estimates the total compliance cost over two years at £300 million.
Shadow chancellor George Osborne said that many retailers were questioning the cost of implementing the VAT reduction and the impact it will have on the High Street when many shops are already offering 20% or 30% price reductions to lure in shoppers.
Tax expert Andrew Smith, chief economist at KPMG, said it was "unclear whether it will tempt cash-strapped consumers back into the shops".
And David Kern, chief economist at the British Chambers of Commerce, said businesses were "disappointed" that a VAT cut was the main feature of the fiscal stimulus package. "The direct benefits of a VAT cut are very uncertain," said Mr Kern. "There could be significant leakages into savings and imports.
"Any boost to personal consumption resulting from lower VAT will be helpful. However, a VAT cut only provides a remote boost to business cashflow and profits. It does not provide sufficient encouragement for business to limit unemployment increases and to continue investing."
The Chancellor told the House of Commons the VAT reduction would "make goods and services cheaper and, by encouraging spending, will help stimulate growth".
