Now on the face of things a cut of the VAT rate from 20% to 17.5% or maybe even to 15% sounds like a great idea and that it’s an easy way to get money back in to people’s pockets; so that they can go out and spend spend spend and watch the economy grow at an astronomical rate.  Well that’s what Ed Balls would have you believe that such a simple thing could be the solution to the UK’s current economic situation. 

Now not being one to just dismisses an idea because it comes from Labour, as they have at times had one or two good ideas within the plethora of total nonsense.  I decided to look up just what we actually pay VAT on.  To my surprise there is actually not a huge amount of things that we do pay it on.  But I think the easiest way to illustrate this would be with a hypothetical family and their monthly spending. 

Now for this Mrs Smith earns £25,000 and takes home after tax £1,613.53 and Mr Smith earns £20,000 giving him a take home pay of £1,330.20.  With their outgoings being the following;

  • Mortgage payment of £700
  • Monthly Gas and Electric £100
  • Council tax bill £110.60
  • Food bill £250
  • Car loan payment £300
  • Pension payments £500
  • Petrol for car £350

Total monthly spend of £2310.60 out of £2943.73 leaving a disposable income of £158.28 per week. 

Now just which of those items have VAT on them, and what rate of VAT they have it at.  Well most financial services are exempt from VAT so that’s the Mortgage, pensions and Car Loan both at zero rate of VAT. But then we have the heating and electric bill’s, now there is VAT on them but not at 20% its only on them at 5%; so a cut in the 20% rate would not affect those bills.  The council tax bill has no VAT on it either.

Which leaves the food bill and petrol, now both of these have VAT on them and both at 20%; however it’s a minority of foods that have VAT on them things like chocolate biscuits, ice cream, fizzy drinks, crisps ect.  So the majority of day to day food is not really subject to VAT.  Now even the guardian accepted that the 2.5% increase in VAT added £33 per year to a shopping bill so a £2.5% cut in VAT would save this family about £2.75 per month.  Not really an earth shattering amount is it?

Then on to the petrol, the £350 is about 246l of petrol at £1.42l.  Now of that £1.42 only 23.6p is VAT at 20% so a 5% cut in vat would save 5.9p and 2.5% cut only 3p.  Which works out to a monthly saving of £7.38 for a 2.5% cut and £14.51 for a 5% cut.

Therefore in the Smiths monthly spend a 5% cut in VAT would save them £20.01 a month.  At a cost of £13bn to the nation, which if they just gave every one of the 30 million people over the age of 18 their share of the £13bn it would equate to the government giving everyone £433.33 each.  Which you would have to argue is a much more sensible way to redistribute £13bn in to the economy. 

So yes a 5% cut in the rate of VAT would have very little effect on the average family as it would equate to giving the two earners in this family £2.50 extra a week to spend which is hardly going to generate a mass stimulus that the economy needs. 

1/22/2013 07:54:37 pm

I have read this, and I get what you are saying, but come on, who actually has £160 per week disposable income? Certainly not anyone I know. The problem with the "average wage" is that there are people who earn staggering figures, and most of us on a dreadful wage.


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