Monday, November 24, 2008

Adviser to the Treasury Select Committe thinks Darings as mad as a box of frogs!

Darling's VAT cut 'could feed deflation', expert warns

A University of Manchester professor who acts as a special adviser to the Treasury Select Committe said today that it was "incredibly risky" for Alistair Darling to have cut the rate of VAT, given the dangers of deflation. The Chancellor today cut the purchase tax from 17.5 per cent to 15 per cent as part of a £20 billion fiscal stimulus to help the economy through recession. He said that the cut was equivalent to putting £12.5 billion back into the pocket of consumers over the next 13 months.

Posted by flintster1994 @ 08:15 PM (1803 views)
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28 thoughts on “Adviser to the Treasury Select Committe thinks Darings as mad as a box of frogs!

  • “Darling’s”

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  • Sorry, I just don’t get it. This prof says cutting tax will feed deflation? So if VAT was increased instead then it would encourage inflation?

    Let’s go through an example. Supposing I’m a homeowner and I can afford to pay a builder £94/day (£80+VAT at 17.5%) to do some work on my house. If the government doubles VAT, then I can still only afford to pay the builder £94/day but after VAT that means he only gets £70. The builder is now being paid less to do the same job. That’s deflation to me.

    Conversely, if the government cuts tax then the chances are the builder won’t cut his rates to match. I’ll still be paying £94 but the builder will get £82 now. The builder is now being paid more to do the same job. That’s inflation.

    You can substitute eggs or pints of milk or whatever you want in your basket of goods instead of a day’s labour. The outcome is the same: less tax means more money for productive purposes which (ceteris paribus) means inflation. Prof Talbot is mistaken.

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  • flintster – I think given some other comments on today’s outrage

    you were probably closer to the truth in your original title

    Daring as in gambling, being a chancing plonker, knowing full well he won’t get strung up etc

    Alister Daring it is then!

    apparently we only need the square root of one percent of the population to realise the daring’s a plonker for the huge shift in consciousness to take place. I’m not sure whether that includes our east european friends, the Welsh, Cornish and Geordie ethnic minorities, but whatever, we ought to be able to get it together by Wednesday afternoon

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  • Completely off topic, but it’s getting late. I wasin the gym the other day and happened to catch an interesting advertisment. Caught the websit address at the end as thewaytohappiness.org. I just remembered it ther and went to have a look. It looked proffessional and strange at the same time to begin with and then I saw the ame L Ron Hubbard. I thought to myself, I recognise that name. Wikid it and yes, Mr Scientology himself. Has anyone else seen the adds on tele? Anyway, thought i’d just mention it. Weird!

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  • drewster – I get your point, but there is a paradox

    What’s the point of tagging humans ‘professors’ if they don’t know what they are talking about.

    Glad I didn’t post the article.

    Look, I may be getting confused between paradox and neoconservatives or radox.

    I’ve been looking for my Human Assemblage Point and I may have lost it in the bathtub

    Right, I’m off down the pub before I upset james

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  • planning4acrash says:

    Ooo, I just realised what they are doing. Taxes are part of the Price Index. So, He can cut VAT and say, oh, look CPI’s gone down, so I can cut interest rates, then, we pay for the interest rate cut via inflation, offsetting our gains, but redistributing yet more cash to the speculators and to big government. Damn, I wanna puke, these guys are DISGUSTING!

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  • frogs in a box are only mad because they don’t want to be in a box

    like you and me

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  • p4ac – I agree – unlike bliar they can’t even fake emotion

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  • political ponerology

    the psychological profile of the legal entity which is a corporation or limited company is

    a psychopath – undisputed truth worldwide.

    more later – but not here

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  • My favourite one so far is don’t be promiscuos. This is fun. How come there’s not a single mention of scientology though on a scientology web site?

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  • I wonder if the actors in the videos were coached by Tom Cruise and John Travolta?

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  • I’ll tell you what though when I first saw the add on tele, before I new it was scientology related, I thought that it was thought provoking. The other videos on the website are as well but difficult to take seriously when you realise that it’s just scientology brainwashing propaganda.

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  • Bet you were gutted titaniccaptain! LOL. How cool is that though? Those nutters asked you to leave as soon as possible. One for the Grand kids.

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  • This whole VAT thing will end up more trouble than it is worth. Many E-Commerce sites will be unable to alter hard coded websites in time as well as replace banner adds uploaded to servers many moons ago. Will you see the pond shops lowering their prices to 98p, will you see McDonalds and other fast food outlets repricing 99p items lower – I think not. Most pragmatic retailers at the lower end of the food chain will simply keep their prices the same and adjust their accounts accordingly.

    The whole thing is an ill-conceived stunt and a complete waste of peoples time that may well end up costing more than it’s stimulating effect is worth.

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  • Enough Already says:

    @6 P4aC – Spot on again!

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  • Wow, Darling’s eyebrows have grown….

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  • Drewster,

    I’ve had a think about your example and I have to say that although I agree with your scepticism, I’m uncomfortable with your explanation.

    “If the government doubles VAT, then I can still only afford to pay the builder £94/day but after VAT that means he only gets £70.”

    “Conversely, if the government cuts tax then the chances are the builder won’t cut his rates to match.”

    Don’t both of those assertions imply a market failure? On the average, free market theory says that the builders should compete to lower or raise price as appropriate. The other think that comes to mind is that much of the savings will be passed on in terms of lower supermarket bills and other mundane day-to-day expenses in which case the cut will achieve exactly what it is intended to do – put a little more money in the consumer’s pocket.

    If the public come to price drops in big ticket items, such as house and cars, then the deflationary threat is real. I suspect that Darling is trying to slip some extra cash into our pockets without us really noticing hence we won’t save it. Certainly, some businesses will not pass on the saving to consumers but they risk losing sales; many will reprice appropriately.

    There! that’s my $0.02 on this one.

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  • Will Darlings spending package be bigger than Obama’s package thats what I want to know.

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  • quiet guy,

    I’m not sure my example (or even my theory) is perfectly sound, but I like to test these ideas by taking them to extremes. Suppose the government had a crazy super-VAT of 50% then everyone would have to cut their prices just in order for things to remain affordable. Consider a hair-cut: if it costs £20 normally but £30 under a super-VAT scheme, then the hairdresser would have to cut their labour costs in order to keep the price affordable. That hairdresser now earns less, so is less able to service a mortgage, so doesn’t borrow money, so deflation gets worse.

    Conversely if tax is cut (not just VAT but e.g. income tax, NI, etc.) then the hairdresser can still charge £20 but will receive more in take-home pay. Admittedly over the medium term other hairdressers may use the tax cut to cut prices, but overall there will still probably be more money in their pockets at the end of the day. More money => more able to service a mortgage => banking problem fixed. Much as I hate to admit it, Darling’s plan is a step in the right direction.

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  • quiet guy,

    Leaving aside the inflation/deflation argument, Mark Wadsworth has written a fairly convincing case on why VAT is the worst tax. If you like diagrams like this, read on…:

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  • planning4acrash says:

    The government put lots of resources into dumbing us down, precisely so that they can pull off tricks like this. So, to all you parents out there. Try educate your children about the truth about markets, and many other things.

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  • @drewster

    “If you like diagrams like this”

    Thank you for your intriguing response. I am going to bed now but I will study the link tomorrow.

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  • nopensionnohouse says:

    Oh great. More conspiracies with gold ramping in one foul swoop!

    Just when I thought it was safe to read what p4ac is saying.

    Bravo!

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  • quiet guy,

    Come along to the Thursday or Saturday meetups for further enlightenment! (see post #16 above)

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  • In a similar vein, it strikes me that the BoE slashing interest rates might actually be having the opposite effect to that intended and fueling rather than curbing deflation. “The BoE’s cut intertest rates by 1.5%. S**t, things must be even worse than we thought, better tighten our belts.”

    Like conspicuous consumption goods and their ilk (trying to remember what they were, but it’s many years since my school days), in some circumstances the normal laws of supply and demand just don’t apply.

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  • nopensionnohouse,

    Yeah I’m not one for conspiracy theories either. What annoys me most about p4ac, s2r1, and even Alex Jones etc, is that they are sometimes very right and sometimes very wrong. When they’re right they’re usually spot-on, but when they’re wrong they’re just so far out it’s unreal. Can’t remember who it was who posted a link about chemtrails on here (google it if you dare…).

    p4ac,

    That link to the schools stuff seems irrelevant to the UK. I know a few newly-qualified teachers, they largely blame family breakdown (and implicitly the welfare state) for the problems of kids today. Excessive demands from parents are a common complaint too – when you have 150 students and 150 sets of parents demanding different things then it becomes a nightmare. For an insight of how teachers think, you could do worse than browse the forums at TeachersTalk.co.uk.
    Conspiracy theories can’t work when hundreds of thousands of people are on the inside. There are several hundred thousand teachers in the UK.

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  • I realise that most people will already “get” this, however just to illustrate how stupid this idea is, let’s look at a simple example of a good currently priced at £49.99.

    Sale Price: £49.99

    Current: Net £42.54 + VAT £7.45 = £49.99.

    VAT lowered from 17.5% to 15.0% gives 2 options to the retailer:

    Option 1: Net £42.54 + VAT £6.38 = £48.92.
    Option 2: Net £43.47 + VAT £6.52 = £49.99.

    End result:
    Option 1: You spend £1.07 less for the item. Govt receives £1.07 less tax than usual. Retailer receives the same amount of revenue.
    Option 2: You are no better off. Govt receives £0.93 less tax than usual. The retailer receives £0.93 more revenue than usual.

    Which option will the retailer pick?

    *IF* a retailer was to pick Option 1, will the consumer rush out and buy the good now that it has been reduced from £49.99 to £48.92, saving them a mammoth £1.07?

    If the retailer plays ball, here are the “savings” the consumer will get on items priced at:

    £249.99 = £244.67 (saving £5.32)
    £999.99 = £978.72 (saving £21.27)

    What a waste of time and hassle for the retailer who has to re-price everything in the store and change their accounting systems (!)

    Another one to file with the 10p tax rate debacle I suspect!

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