The Great VAT Con comes in to effect today – most people believe that a 2.5% cut in VAT from 17.5% to 15% means a £2.50 drop in prices for every £100 spent at the tills.

Let’s demonstrate the con with some basic maths – £100 plus 17.5% is £117.50.

A 2.5% cut in VAT to 15% is not £100 plus £15 equals £115.

Why not? Because that 2.50% cut only chops £2.10 off the price.

So the great giveaway to encourage extra spending is not so great, and worst of all, the Chancellor Alastair Darling has spun the move to make everyone feel better in a bid to loosen purse strings.

The problem is the Government is following the doctrine of Keynesian economics that put us all in this mess in the first place. The great economist John Maynard Keynes talks about the ‘paradox of thrift’.

Basically this means people stop spending and hang on to their cash in a recession because they want liquid assets handy in case they fall on bad financial luck – as if a recession wasn’t bad enough luck.

This makes the recession worse because businesses can’t sell their products, so output declines even more, making the recession worse. The economy is stuck in an ever-decreasing circle until circumstances allow people to spend again. 

That’s why the Government wants us to spend their way out of recession to counteract the paradox of thrift.

The question is, have they done enough to kick-start the economy or will the whirlpool continue to suck in jobs and businesses? One the whole, it looks like too little.

After a week of more bad news in the High Street, with Woolworth’s and MFI going in to administration and B&Q closing nine trade depot superstores, the John Lewis partnership’s weekly trading report shows a continuing downward trend.

For several weeks running, the report has showed a consistent 13% year-on-year fall in sales.

Other big names teetering on the bring are electronics conglomerate Curry’s and PC World after announcing £15 million losses, Clinton Cards, Land of Leather, and DIY giants Focus and Fads. 

The car industry worldwide is gripped by crisis as all the big carmakers in the US, Japan and Europe undertake cost-cutting exercises. 

The ‘nationalisation’ of the Royal Bank of Scotland completed last week, as the taxpayer now owns just less than 60% of the bank.

On the housing front, Nationwide Building Society released figures showing house prices had fallen only 0.4% in November – a 13.9% year-on-year drop.

The markets were a little more forgiving last week.

The FTSE100 continued a slow recovery from the five-year low of 3665 on October 27 to finish last week at 4288 – a rise of 15% over the month.

Wall Street bounced back from 18.5% from a 12-month low of 7449 the previous week to close at 8229 on Friday.

On the money markets, the Pound strengthened slightly to £1.49 against the US dollar. Against the Euro, the Pound moved slightly from £1.18 to £1.19.

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Tags: Alastair Darling, Bank of Scotland, British Pound, Budget, Chancellor of the Exchequer, Nationwide, Tax, Tax Cuts, Tax Payer, Tax Time Bomb, UK Credit Cards, UK economic activity, Uk in recession, UK Recession, VAT

Chancellor Alistair Darling has put the UK economy in to hock with his £118 billion spend now pay later gamble to beat the recession.

As predicted, he ripped up Labour’s financial rulebook and has bet all the country’s money for years to come on a toss of a coin to boost the economy now.

Whatever happens, the pain will come later as the government winning the next election in 2011 will pick up the tab by having to repay massive debts by raising taxes.

The Chancellor has admitted that everyone earning more than £40,000 will feel the pinch later – alienating millions of middle ground voters and top earners.

The real question is has he done enough now with yesterday’s 2.5% cut in VAT, income tax cuts, more child benefits for families and a one-off payment to pensioners?

The VAT cut, due to take effect next Monday, gives everyone a miserly £2.50 saving in every £100 spent.

Accountants KPMG have calculated the effects the changes will have on the pound in your pocket:

If you earn £110,000 a year you will have an extra £118.80 to spend next year and £215.58 the following year. That’s a paltry £2.28 a week going up to £4.15
For those on £50,000 a year, the extra income tots up to £343.30 next year and £240.08 for the year after. That’s £6.60 extra a week falling to £4.16.
Big earners taking £150,000 or more a year also picks up £343.30 extra next year but are £2246.70 worse off after that. That’s the same £6.60 a week increase as lower earners next year but a massive £43.20 a week drop comes on the back of the good times.

Both the Tories and Liberal Democrats have slammed Darling’s action as irresponsible and a ‘tax time bomb’ for the next decade.

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Tags: Alistair Darling, British Economy, Labour, Recession, Tax Cuts, Tax Time Bomb