VAT rise could push UK economy into double dip, says leading economist
Chancellor George Osborne, in a recent interview, has dashed any hopes of the impending VAT rate rise being revoked as soon as the economy picks back up, saying that it is a ‘structural’ change to the tax system.
The interview is reproduced in part here on The Spectator blog , Coffee House and it immediately provoked a response from the investment community.
John commenting on The Daily Mail’s site says: “Well you heard it from the horses mouth. Vat, the only tax that affects ALL students, pensioners and families will stay up, but the 50p tax that only affects the wealthiest will come down…as soon as the government coffers are fuller. Translated from Tory speak: “you all have too much money, unless you are loaded and then you don`t have enough”
Double Dip trigger?
The VAT rate rise has been controversial ever since it was announced. Back in October Simon Ward, chief economist at Henderson Global Investors warned that raising the VAT rate in January could push the UK economy into a double dip recession. We reported that here .
Only time will tell whether the government should have heeded his warning to postpone the rate rise.
Why is VAT going up?
The reasons behind the rate hike are simple. The Office of Budget Responsibility has revealed that the VAT rise due to come into force in January is intnded to reduce the UK’s gross domestic product by 0.3% in 2011-12.
As Tom Clougherty, executive Director of the Adam Smith Institute, writing in The Yorkshire Post puts it: “In plain English, that means raising VAT from 17.5% to 20% will destroy some £5 billion of economic activity in the next tax year. The reason for this is simple: raising VAT will dent consumer confidence and discourage spending; fewer goods will be sold and lower profits will be recorded.”
What the rise will mean to consumers
A report from data management firm Acxiom has found the increase will cost the average household £225 a year – soaring to £448 for more well-off families, as reported here on Beatthatquote.com.
DennisCooper commenting on the BMW 5 Series owners forum is sanguine about the rate hike: “The VAT increase is a measure which will help the UK slowly recover from it’s massive hangover from the crazy borrow more & spend more days.
“On a national level, that’s what the last government did, and on a banking and businesses level it was done and of course by individual consumers as well.
“Everyone in reality, who spends more than they bring in will eventually be brought back down to earth with a bump. You have to pay back what you borrow!”
Effects on business ?
For businesses, the response has been mixed. According to an Institute of Chartered Accountants in England and Wales (ICAEW) poll, businesses are split about how they will deal with the increase in VAT. It found that six out of every 10 businesses believe that the VAT hike will affect their organisation’s cash flow to some extent.
Nearly one tenth think cash flow will be affected to a significant degree, as reported to Bytestart.co.uk , a site for small business owners.
The British Retail Consortium has calculated that the VAT rate rise will cost 30,000 jobs next year, and a total of 163,000 jobs by the end of 2014.
David B Smith, a visiting professor at the University of Derby, has also run the VAT rise through his Beacon Economic Forecasting model, and found that the 20% rate will increase the number of people claiming unemployment benefits by 236,000 over the next 10 years.
As the Adam Smith Institute’s Clougherty, says: “That’s bad enough on its own to raise questions about the Government’s plans. Does it really make sense to be willfully damaging the private sector economy, when the recovery is still so fragile?
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