VAT and the public finances

I have some good news about the temporary VAT cut. It won’t be as expensive as we thought.

The original cost estimate, £12.4 billion, was based on economic assumptions that turned out to be too rosy. The economy will sorely underperform the Treasury’s predictions from back in November, and consumer spending will likewise fare worse than the 1–1.5% decline forecast for 2009. Fewer sales means that the reduction in VAT will cause the Treasury to forgo less revenue than expected, making the cut cheaper and leaving the public finances in better shape.

Huzzah!

Now the bad news: less consumer spending means lower VAT receipts overall, substantially outweighing the reduction in the cut’s effect on the public finances.

Boo.