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How much use is a brief, small VAT reduction?

by Scott Bicheno on 25 November 2008, 17:57

Tags: HM Treasury

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Keynes again

So the attempts at Keynesian economic stimulus continue. By increasing public spending (or bringing forward, as the government spins it), the government creates jobs, which in turn increases the amount of money in the economy.

However it seems the Chancellor thought the economy needed even more money than that pumped into it and the vector he chose for this was VAT. By his calculation he is effectively chucking over 12 billion quid into the pot for us all to play with, but is it as simple as that?

As a consumer, is a reduction of two-and-a-half percent of the cost of a product or service going to have much of an effect on your decision to buy? A tenner off a £50 shirt might convince you, but a solitary quid? We think not.

Furthermore there are practical considerations on the channel side. We spoke to Dave Taylor, who is territory manager for electronics manufacturer BTC and sells the Emprex and Cibox brands into retailers like Argos.

"This VAT drop seems to be a bit of a drop in the ocean," said Taylor, before indicating that he'd anticipated a much more aggressive VAT cut. Taylor went on to point out that it's not always convenient for retailers to pass on the VAT reduction.

"What about a £99.99 price point?" he asked, his point being that reducing that price to £97.49 would be a hassle and have minimal impact on the likelihood of a purchase. "I don't see how it will increase spending at all."

And there is hassle involved; high street retailers will have to change the item pricing and price related displays. A member of the Brigantia community of independent technology retailers, using the forum name ‘Workaholic', simply said "We are going to ignore it for the most part," when we asked the forum what it thought of the move.

We also spoke to Elan Raja, a director at technology etailer Scan, to see what he thought of the move. "I can't see this having much effect on B2B transactions and at the consumer level it will probably only influence higher value purchases," said Raja.

His rationale was consistent with ours and Taylor's; a saving of a couple of percent just isn't enough to significantly affect a buying decision at lower price points. Only when you start saving significant sums, let's say on purchases in excess of a thousand pounds, does the reduction start to encourage spending.

"The government has got to be seen to be doing something, but I don't feel this will stimulate the key price points," concluded Raja.