Sunday, 23 November 2008

From tax and spend to tax and spin

The Ministry for Propaganda has been very busy today in advance of tomorrow's crisis budget. Following the leaking of the thoughts of poor Gordon and his friend Mr Darling over the last couple of days they appeared on television screens today to say nothing of substance but assure us all, under no probing questioning from the BBC at all, that only they can cure the country of its economic ills.

Having failed to say whether they would cut VAT, they then told the BBC off the record that this is indeed their plan and that it will fall from 17.5% to 15%. Others had already commented on the likely ineffectiveness of this. John Redwood pointed out that a small cut in prices through reducing this tax is unlikely to be noticed when many shops are discounting goods by far more already and that for those on low incomes much of their necessary expenditure is on items which are not subject to VAT at all. Via Mr Tyler I have been alerted to the insights of a real shopkeeper who explains the ability of stores to decide how to pass on the cut, and Mr Croydon highlights just how piffling the reduction is.

Now don't get me wrong, I'm all in favour of cutting VAT, I just don't see how it can make a significant difference to the rate at which the UK economy goes down the plug hole. It makes me ask why they have chosen to follow this path. Perhaps I am being unfairly cynical but it seems to me that cutting VAT is the most easily spun option available to the government. It can be presented in all sorts of interesting ways, each of which makes the cut seem so much more than it really is.

Reducing a tax from 17.5% to 15% is a cut of one seventh, indeed the reduction is one sixth of the new rate, these are chunky proportions. Will we hear one of the more dishonest ministers, perhaps a Blears or a Harman or even poor Gordon himself make this sound like: "Government cuts prices by one seventh"? That it reduces the actual shelf price by only one forty-seventh is unlikely to figure in government announcements.

Another possible approach is: "Government cuts sales tax by 14%". This works rather nicely. The tax is 17.5% and it is being reduced by 14%, it makes it sound as though there is hardly any VAT being charged any more.

Try this one: "Hardworking families faced the threat of a bleak Christmas. Those little extras that make Christmas so special threatened to be out of their reach. We have taken a direct measure to make them affordable just when people need that help the most."

Or this: "Hardworking families now have greater choices over how to spend their money."

And we can be sure to be assaulted by this combination of half truths and three-card trickery: "International conditions have forced up prices, we are protecting hardworking families and shopkeepers by taking direct action to bring prices down."

There is just so much more they can do with a sales tax reduction than they could ever do with shaving a penny off income tax. None of it has any substance but we are in a pre-election period and appearance is everything. Every different angle of spin put on this inconsequential measure will buy them a few more votes.

Let's get back to real life. Imagine you own a shop. Your livelihood depends on you being able to buy goods at one price and sell them for a higher price. You have to pay the operating costs of the shop building and the wages of your staff. Recession hits and fewer people come through the door. What can you do? You could raise your prices and hope the reduced number of customers will be prepared to pay more, or you could reduce your prices to get more customers at a smaller profit margin. For the vast majority of shops only the latter is a realistic option. So you reduce your prices. Just a bit at first then a bit more. People return to your shop but not enough so you cut your profit margin further and then find sales increasing to a bearable level. You are just about able to stay in business. You know that the new price you are charging, let's call it the benchmark price, is one customers are prepared to pay so you then turn to reducing your costs. Out of the blue the Chancellor of the Exchequer says he is going to reduce sales tax from 17.5% to 15%. You know you can still sell at the benchmark price so the reduction in sales tax acts as a reduction in your costs. You might have to pass on some of that because your customers will expect it, but you will not have to pass on much because your new benchmark price has been established. There is no significant financial benefit for your customers but you get a little extra breathing space, a little extra time in which you hope trading conditions will not worsen.

All the spin about a reduction in VAT being a benefit to Mr and Mrs Ordinary is just guff. The reduction is of benefit to the economy, almost all tax cuts are, because it reduces the costs of businesses. For some it will make the difference between survival and folding, for others it will just delay the inevitable collapse and for the others it will allow a modest increase in profits above the deflated level the recession has caused. What it will not do is any of the populist, headline-grabbing things the government will claim.

The way the leaked VAT proposal was being analysed and reported clearly did not suit the government. Too many people were saying it would provide little benefit for the lowest paid whilst those with money to spend would gain the most. Something had to be done. The evening news programmes were approaching and then, as if by magic, it became known that Mr Darling would announce a proposal for the top rate of income tax to be increased to 45% for those earning £150,000 or more. Nick Robinson announced this in hushed and reverential tones on Radio 5 and one by one the usual suspects crept out from under a Stilton to spit venom at the wicked rich people. The more balanced commentators noted that the effect on tax receipts was likely to be so small as to be irrelevant but the government's paymasters in the unions and their core vote among the non-thinking love a bit of toff-bashing. Nothing distracts the BBC away from criticising a badly thought-out tax cut than a suggestion that evil fat cats will be screwed for more. A fine piece of news management by a government dedicated to announcing policies in Parliament first.

I await the year's second crisis budget (remember the 10p tax mess?) with interest.


Bob's Head Revisited said...

Excellent stuff, FBO. You've managed to make an incredibly dull subject very interesting. Ta!

TheFatBigot said...

All part of the friendly Fat Bigot service.

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