Wednesday, February 18, 2009

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.

3 comments:

tim f said...

If we keep this up then maybe we'll have enough to funnel into child tax credit & child benefit, and meet our 2010 targe on child poverty.

Tom Freeman said...

Ideally, of course, the entire economy would grind to an absolute halt, because then we could abolish VAT, income tax, NI and corporation tax without it costing a penny...

tim f said...

Or, we could create a socialist utopia with 100% tax on everything without it having any political costs.