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

Banks warned that they would not pass on all rate cuts from the upcoming Bank of England Monetary policy Committee. On top of that, the EU said that the UK would be hardest hit of all EU economies as the crisis deepens and the IMF looks set to need further cash for bailouts of emerging economies.

This was a severe blow to Gordon Browns attempts to paint himself as the man to lead Britain through the crisis.

David Hodgson, chief operating officer at HSBC said that he expected some stickiness in rate reductions as the expected bank of England rate cut comes on Thursday. “Clearly if interest rates are down significantly, the rates for borrowing will go down. But I am not going to say it is absolutely linear, because it depends on the particular [situation] and the risk.”

“We will do our best but I will not give a categorical commitment that they will come down.

“We would listen. We are in a very, very turbulent position and it’s very hard to predict what markets will do.”

This is a clear indication that lending standards are continuing to tighten as banks seek to strengthen their own positions.

This stance by a major banker shows just how much influence the prime minister really has over the banks…very little. Gordon Brown official spokesperson said that if the official rates fell, customers and small businesses could expect to see the full benefit of such a cut.

Clearly, the bankers have other ideas. Last month, only half the banks passed on the full 0.5% rate cut in their standard variable rates. Moneyfacts, the financial website said that the 82% of lenders had not passed 100% of the last 3 rate cuts.

The EU commission painted a bleak outlook for Britain over the next several quarters with unemployment rising to 7.1% or 2.25m, a contraction in GDP growth of 1% in 2009 and anaemic growth of only 0.4% in 2010.

The EU also said that it expected the government’s borrowing and the budget deficit to surge. Fasten your seat belts….because it’s going to be a bumpy ride.

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Tags: UK hard recession, Uk in recession, UK Recession