...like a sieve

So many sources are coming forward with the assumption that in tomorrow's PBR there will be a temporary reduction in VAT from 17.5% to 15%, that you have to ask why the government is leaking like a sieve. It has to be a deliberate policy .

After all, it alerts and prepares the Tories. It's difficult to reply to the chancellor's statement, but to give advance notice makes it easier to prepare rebuttals. It seems that the proposal, which would raise about £12.5 billion on this one element out of supposedly £15 billion altogether, is the central plank.

Or is this a case of setting a trap, of sending the Tories off on the wrong track? Or are Labour trying to drive a wedge between Ken Clarke and others who proposed the VAT reduction and Cameron who has set his face against it? Or both, and perhaps other objectives as well?

Some comments on the VAT proposal.
I didn't consider the VAT proposal in a blog recently, for a number of reasons:

It will impose additional costs on retailers and others, as they have to re-set software and print new publicity and price labels.

As a consequence, some sellers may simply absorb the gain themselves, rather than increase their costs, or they may wait to see what happens.

Will the reduction have much effect? The declared aim is to put money into the hands of the poorest in society as they are more likely to spend it. However, much of their expenditure is on items which are either zero rated, - food, children's clothes, etc., or expenditure on items where VAT is 5%, - energy for example. In both cases there will be no change in price and no extra money left in the consumer's pocket. The major effect will be expensive luxury items where the small percentage change could amount to many pounds.

If this is right, than the policy seems likely to benefit wealthier members of society more, and they are more likely to save any advantage than poorer people are.

How great a stimulus? Since the reduction is of 2.5% on the pre-tax price, the price reduction facing a consumer will be much nearer 2% in the overall price facing him. If something would have been £100 in price before any tax, with a price of £117.5 including tax, then a reduction of £2.50 to £115, is actually a reduction of 2.1%. Given that retailers are already making sweeping reductions, of 30, 40 or even 50 percent, is a change of this magnitude going to add very much in attracting a purchase? Calculations on shopping baskets suggest that households could be better off by somewhere between £5 and £8 per week. This is welcome, but will not add very much. It could, however, add up over a month and make it slightly easier to make a monthly mortgage repayment. But this repayment is not what G. Brown wants, - he wants them to spend it.

If extra spending is generated, how much will be on imported goods, again defeating G. Brown?
There is a suspicion that much go on foreign wine or food, or on other luxury gifts which are in stock and cannot be expanded in output very soon.

Some goods which could enjoy a spur include one or two which are "bads" although good government revenue raisers. Among these are alcohol and tobacco products.

Leaving aside questions of how long the temporary reduction in VAT will be, and how much the increase will be afterwards, the general conclusion seems to be that the response could be muted for many of the reasons above, and slow. Most of all, this part of the PBR proposal will be of much more benefit to wealthier people than poor people, - very strange coming from Brown.

We can only assume, after all the thought by many experts over so many days, that the other parts of the PBR proposals will redress this effect, perhaps an increase in the various benefits, perhaps something for those who have still lost out over the 10p tax band fiasco, but not a general raising of the threshold tax level unless we have been mislead about the size of his fiscal stimulus.