Well, with it seeming almost certain that VAT will drop by 2.5% to 15%, what difference will it make? The difference, some simple maths tells us, will be 2.127659574468085106% (which we’ll round up to a 2.13% decrease in price for simplicity’s sake).
However, with this measure meant to kickstart consumer spending, what difference will it make? Very little, Mr. Mushnik. Let’s do some simple analysis.
As major purchases are most likely out of the question, let’s try something simple, like this Christmas’s must-have gadget, the iPhone 3G. That, with the 17.5% VAT rate, costs £349. Multiplying that by 0.9787 (subtracting 2.13%) gives us a grand total saving of… £8.43. Yes. With this measure, designed to kickstart the economy, the iPhone will now cost £341.57. Of course, figures may not be totally accurate or add up to 100% due to rounding.
In this respect, let’s try something more substantial, like a Samsung 40″ HD ready LCD TV from Currys. At present, it costs £549.99. With the cuts, it is… £538.38. Great. So you can save enough money to buy a DVD with your TV. T’riffic.
Going even more substantial, let’s try a car. Like, for example, a Chevrolet Lacetti, used as Top Gear’s benchmark reasonably priced car. The base model is £11,995. After cuts, that’ll be £11,739.51. Again, not a major difference considering the actual cost of the thing.
In this case, let’s try the other end of the spectrum as cars go. Aston Martin have recently announced the new One-77, which will cost somewhere between £1,050,000 and £1,200,000. We’ll take the 1.05+E6 figure as a conservative estimate. After cuts, that’s £1,027,635. That’s quite surprising: that’s a major difference.
So the VAT cut MAY make a difference after all: unemployed bankers undergoing early mid-life crises will all buy overpriced supercars, bouyed on by the fact they’ll have twenty-two grand left over at the end, which will cause all Aston Martins to fall way down Top Gear’s cool wall, which will ruin Aston Martin’s business, which will cause the automotive industry to collapse which will cause another crash on Wall Street which will eff up the economy for the next thousand years. Darling, YOU IMBECILE!
But the point of the cut isn’t that you’ll be inspired to go out and buy something like an iPhone or TV because of a pretty paltry reduction in price. The point is that when you’ve done £100 worth of shopping, you’ll be left with £2.13 in your pocket - which you’ll more than likely then go and spend.
The overall amount you spend will stay pretty much static, but an additional 2.13% of the money will be flowing through the economy instead of into the Treasury’s coffers, hence supporting business, manufacturing, and the economy as a whole.
The stuff about helping hard-working families is just politically motivated double-speak: Of course, it will ultimately help families as it’ll help people stay in employment, but the cut itself will do very little to help individuals.
Comment by sjhoward — Monday, November 24, 2008 @ 20:11