by Dan McCurry
When I was in Arizona, I kept getting overcharged in the shops. At least I thought I was, until I objected and was told that the extra 7% was the state sales tax. They weren’t including it on the price tickets, because Americans are weird. These days Arizona charges a whopping 9%, compared to Virginia at 5%, and New Hampshire at 0%. There is no strategy between these different rates. This is America. The states just do their own thing.
In the UK we pay 20%, and we call it “Value Added Tax”, because we’re not weird. Imposed centrally, we apply this tax at a uniform rate across the country, but if we wanted to, we could charge different rates in different regions, while continuing to collect it centrally.
There is a potential serendipity to Labour’s economic policy, when looking at two of the main drivers of stimulating the economy in Labour’s five point plan for jobs and growth: house building and a VAT reduction.
Mass house building is firstly intended to create demand in the economy, but by solving our chronic housing shortage, we reduce our private sector rents, and thereby counter poverty. It all seems so neat that, however, there is a flaw in this strategy.
The area that needs massive house building is London and the South East, but the economy is fairly frothy in this area, so there is not much of a demand problem. Much of the rest of the country doesn’t needs housing, but does have a lack of demand.
So although there are many infrastructure projects in other parts of the country, the stimulus from house building would mostly effect the south east, which is not where it is mostly needed.
The other policy of Ed Balls is to affect consumer spending through a reduction in VAT.
The problem with VAT is that it can be fiddly. When Gordon gave us a 2.5% cut, I don’t think I’m the only one who was irritated at being given coppers in change for my coffee, and it didn’t take long before the coffee price went back up and the vendor pocketed the difference. Retail prices tend to gravitate to round numbers, meaning that VAT cuts need to be substantial to be worthwhile.
If Ed Balls concentrated his VAT cut on the regions that are not getting a house building boost, then he’d probably be able to double the size of the VAT cut. In simple terms, let’s imagine the counties in north of England have their VAT reduced to 10%.
