...*Jenn

Labour creating a pure illusion


Cutting VAT by 2.5% will not help at all. Just as Paul Lewis has commentated, if my fish and chips was £7.95 then it'll only be £7.78. So do people really care about this 17 pence difference? I think not. Another example, if a wide-screen TV you wanted to buy was £299 will the shop actually cut it's price to £292.64? The answer is NO!

First of all, it's an awkward amount. Shops and consumers do not like to deal with the pennies.

Secondly, will the all shops really lower their price? NO, because they are not obliged to. If they were forced to, then yes, maybe we'll see a slight cut in prices but it's not going to be an significant amount anyway. So either way, we won't be able to benefit a lot.

Thirdly, Christmas sales is around the corner and some shops like M&S and Debenhams have already started their sales earlier to clear this year's stocks. So is there any point in having this VAT cut policy in the pre-budget report? No. But it's certainly a good way to please the public who do not look into this issue and have this illusion that 'yes I have more disposable income now, so I can spend more'. But few will think, 'hang on a minute, am I really that well off now?'

Furthermore, this VAT cut is actually cleverly balanced off with the 20% increase in National Insurance contributions. The Tories are arguing that you'll be hit the most even if you are earning £20,000 a year. But their figures were questionable. However, it is confirmed that if you are earning £40,000 a year (that's more than one and a half times of average wages around the UK) you'll be paying £423 a year more, starting from April 2009. That's a big rise in your tax and National Insurance (NI) is just a tax by any other name. Again, this is how politicians play around with their numbers. So basically, even though income tax has not been raised this coming year, you'll be paying more NI.

Actually, I could go on and on but I think that's enough for today. Got to get back to my 'The Economics of Staging the Olympics' by Holger Preuss. Aiming to finish this book by tomorrow.

Do feel free to leave comments about this issue. Tell me what you think? But if you don't, that's fine as well. This was just an issue that I was following this week and wanted to share some thoughts.