Was The Recent Cut In VAT Worth It?

18 February 2009, 16:54

If you cast your mind back to last November, you will no doubt remember that the Chancellor Alistair Darling announced a temporary cut in VAT. The idea behind this was to help kick start the economy once again, and get people out and about and spending money. The price of goods, after all, would fall by 2.5% once the usual 17.5% VAT rate went down to 15% on the 1st December.

But did it do any good?

We are now nearly three months down the line from when that change came into effect, and there are mixed reviews of the move the Chancellor made. Quite understandably the Tories are calling the VAT cut a failure. We could be sceptical as far as that particular comment is concerned, since whatever the party in power does the party in opposition immediately opposes it.

But there has been little support or news of it being a resounding success elsewhere either. Many businesses actually disliked it right from the start, coming as it did with very little notice.

Some have called it a kneejerk reaction to the worsening economic situation, while others have called it a total waste of time. Take a look at this article from the BBC website, for example. This was published just after the announcement about the VAT cut was made, and as such it captures the initial reactions to the news. You can read it here.

It is interesting to note that all these weeks later the reaction has not really changed at all. Coming as it did in the run up to Christmas, the idea was clearly to encourage people to get out and start shopping and make the most of the cheaper prices.

But if that was the basic idea it seems to have had little effect. After all, 2.5% doesn’t actually make much difference when you think about it. If you spend £2 on something, you are now going to pay £1.95 instead. Would that encourage you to get the cash out of your pocket?

It will be felt more keenly on bigger purchases of course – but those are just the kind of purchases that people aren’t willing to make at the moment. With so many uncertainties over jobs, who can blame them?

So it seems that the VAT rate cut has led to very little difference for consumers. And it has also led to a lot of headaches for businesses. As mentioned previously it didn’t come with much notice, and that led to problems with implementing the whole thing.

And since it wasn’t compulsory to bring the changes into effect, some stores were late to make it happen – or simply decided not to do it at all. And who can blame them?

In the end it will be interesting to see how this event affects the government. Many people believe the VAT cut was nothing but a damp squib – but it could well backfire on them when it eventually goes back up again.