PBR: VAT cut unlikely to boost spending

Chancellor Alistair Darling today announced the much-anticipated cut in VAT to 15% from 17.5% as of Monday, 1 December. But critics say it will not be enough to boost consumer spending. Michael Devereux, director of the Oxford University Centre for Business Taxation, said the cut is 'a poor way of generating increases in consumer spending' since it will not be fully passed on in lower prices. 'Prices for many goods tend to be in round numbers, or just under: eg £10 or £9.99, including VAT. A cut in VAT to 15% could in principle reduce a £10 price tag to £9.79. But prices are sticky - there are short-term costs in changing prices, and benefits for hard-pressed retailers in taking slightly higher revenues by not changing prices. It is unlikely that the whole reduction will be passed on to consumers, and possible that very little will be passed on, at least in the short term. If consumer prices are not affected, lower VAT only yields a windfall gain to firms. This may help cash-constrained businesses to invest, but other policies would be more targeted to investment,' said Devereux. Devereux added that consumers would save the tax cut, rather than spend more and that any benefits from a reduced shopping bill may be saved or spent. He also believed that the cut is not targeted towards those most likely to spend more. In addition, he said, any increase in consumer spending will go on imports, which do not benefit the UK economy. In his pre-Budget report delivered this afternoon Darling also announced his economic forecast of growth next year - from -0.75 to -1.25% - a sharp turn from the previous year's forecast of +2% growth. The chancellor said that UK GDP growth this year as a whole is expected to be 0.75%. Output will continue to fall for the first half of next year. GDP is expected to fall to between -0.75 and -1.25% next year, he added. Government borrowing will rise to £78bn this year and £118bn next year, Darling said.

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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