Darling cuts VAT in pre-Budget

[T_i_B]

Any thoughts on all this?

http://news.bbc.co.uk/1/hi/uk_politics/7745340.stm

Chancellor Alistair Darling has cut VAT from 17.5% to 15% in his pre-Budget report as part of an £20bn package aimed at kickstarting the UK economy.

But a new tax rate for earnings over £150,000 - and all National Insurance - will increase to help pay for it.

And duties on alcohol, tobacco and petrol will rise so the price remains at their current level.

Mr Darling said he wanted to soften the blow of a recession with the UK economy officially set to shrink next year.

[D-Notice]

1. Taxing the rich to help the rest of us?

That sounds like socialism!

[mrfrapp]

2. Duty

Will the duty on alcohol, tobacco and petrol drop when the rate of VAT is increased again? My guess is, "no".

[LeftishBrit]

3. Apparently most of the taxes on the rich are scheduled to start in 2011

By which time they might have been scuttled by Dave and dear little Georgie (though I hope it won't come to that!)

[muriel_volestrangler]

4. VAT is set to go back up in January 2010

which will presumably mean a jump in the inflation rate then, lasting a year (how much of the index is from items that attract VAT?). Does that indicate a 2009 election, rather than fighting it under a higher number? Or would having an election in the middle of the recession be 'political suicide', in the cliche?

[T_i_B]

5. But if people think that the tax cuts are temporary....

...and taxes will have to go back up before too long anyway, then won't people just save their tax cuts instead of spending it? :shrug:

[muriel_volestrangler]

6. Could be - I don't think anyone really knows how things will turn out

or how people will react in this recession - certainly I don't. I just reckon I stand more of a chance predicting what the government will do than what the general population will - politicians are far simpler folk.


I'd think the VAT decease won't have much of an effect on prices in shops before Christmas - I'd think that the VAT from the earlier stages of manufacturing or wholesaling will still be 17.5% if the goods were sold to the retailer before Dec 1st, so I doubt shop prices will see much of an immediate difference - perhaps a few more items will go into sales if the shops dare. Things like VAT on restaurant meals are unlikely to bring prices down - they won't want to reset all their prices by 2.5%; it's just more likely to postpone any price rises they might have contemplated. It may keep some struggling businesses afloat if they can take it as profit where they weren't making any, and that'd be a good thing.

And then it'll all be reversed. Meh - I don't run these businesses - who am I to say how they'll deal with it?

[Donald Ian Rankin]

12. You can't save a VAT cut.

It only becomes relevant if you spend, and the amount it saves you is proportional to the amount you spend.

[Anarcho-Socialist]

7. the Tories are shreaking about the national debt et al

but they have no alternative plan. According to today's Grauniad the Tories don't plan on repealling the new 45% tax band after the next election. There isn't much any government can do other than pump liquidity into the economy since monetarism has been exhausted. I suppose the differences to be had will be the manner which, and to what extent the fiscal stimulus is implemented.

The year-on-year deficit per % of GDP is similar to what the Major government ran up to get the economy out of the 1991-3 recession. The deficit is similar to which the Callaghan government ran up before the IMF loan (although Brown/Darling didn't have Callaghan's inflation problem, and nor is the Pound in trouble despite the Shadow Chancellor talking down the Pound).

I think that the fiscal stimulus package is not enough and deeper short-term spending (or tax cuts) is required. A deeper cut in VAT is necessary, or money supplied directly to working class families to ease the burden of recession, and still enough to stimulate the economy. The other alternative is for the British government to hope that Obama floods the world with Dollars again a la Reagan and that an export-led recovery for Britain can be achieved.

A bigger problem than the Credit Crunch will be long-term effects of the Major-Blair PFI projects which has vacuumed huge funds from the public for little value in return.

[T_i_B]

8. I disagree about the Pound being in trouble

Sterling has lost a heck of a lot of its value from what it was just a few months ago, and is still on the downward slide. this is already having a very bad effect on imports.

What's worse is that exports should be doing a lot better thanks to the weak pound, but demand overseas is in a bad way as well, so exports are still in a bad way and we are being wacked on all sides really.

There are a number of threads about the state of the Baltic Dry Index on DU at present and those threads are as good a guide as any as to why I worry. I don't blame the government for prescribing a stimulus for our economy, but I do worry about the side-effects.

[fedsron2us]

9. Sterling has some way to go before it beats the lows

against the dollar achieved under the blessed Margaret in 1985



In fact, though the falls look huge, it has moved back to trading nearer its historical average. The aberration was the $2 seen in recent years.

Personally I do not think that any of the changes made by Darling are going to make much difference to how this unravels. The simple truth is the world has seen a credit bubble of the likes not expereinced since the 1920's. There are really only three ways to deal with the resulting debts

1. Default
2. Inflation.
3. Repayment.

I expect we are going to require a mixture of all three to resolve the crisis. The one thing the government should not do is to try to prop up the value of assets such as houses which really need to fall back to their historical norms (ie with mortgages circa 3.5 times wages). Unfortunately this bolstering of asset values seems to be exactly what the authorities here and in the USA have in mind. Indeed, the desperate bailing out of Wall street and the City just goes to show how laughable were all those lectures the population received from financiers over the years. It seems that only the little people were required to 'change to survive' in a globalized world. When the wolf came for the elites it was open the public purse and hand outs all round.

In fact it seems almost anything is being contemplated to maintain the status quo for the rich. They are hypocrites to man and deserve to be lynched by the mob from the nearest lamp post.

The sad thing is that the traditional left has been largely silent at this huge largesse to the wealthy and it has been left to a handful of cranky fiscal conservatives and green sympathisers to call the crooks out.

http://market-ticker.denninger.net/archives/667-Tired-of-The-Crash.html

http://globaleconomicanalysis.blogspot.com/2008/11/bailout-pledges-hit-77-trillion.html

http://suddendebt.blogspot.com/2008/11/how-many-trillions.html

[Anarcho-Socialist]

10. I don't see it that way

The Pound has been overvalued since 2002. The $1.5 level is quite typical of Sterling's trading range from 1995-2002.

[muriel_volestrangler]

11. Current level seems very close to the purchasing power parity levels the OECD reckons

They are:

       2004   2005   2006   2007
$1 = £0.632 £0.649 £0.652 £0.666
£1 =  $1.58  $1.54  $1.53  $1.50

source

[T_i_B]

13. Who's to say it won't go lower?

A lot of people are expecting the pound to fall to $1.20 before too long. I hope that it doesn't but it would not come as a suprise if it did. It's certainly been on the slide towards that figure over the past few months.