VAT cut... who is going to buy more stuff?

[kalniel]

I was thinking about it earlier, and came to the following conclusion - no.

My reasoning was the same point that Andrew Neil just made on the Daily Politics - walk down the street and you see shops with 25, 50, even 70% off, so a few extra % isn't going to make much difference.

So why do we moan so much about a few extra % when it's put on at the pump?

But don't get too happy with the VAT cut as the Government will put taxes up to grab it all back. Give with one hand take with another- New Labour's new motto (or has that always been their motto?)

So by the same logic, anytime they put up taxes they're actually saving us money elsewhere, so you're the one cheering when they announced the original 2p increase in duty or abolishing of the 10p tax category then?

[Stringent]

Don't get me wrong, any saving is good. I just don't think we will see it really unless we do a before/after comparison. The fact is the VAT is all worked into the prices we have, with petrol its far more visible on the forecourt. So its really noticeable when it goes up/down.

[AledJ]

So why do we moan so much about a few extra % when it's put on at the pump?

So by the same logic, anytime they put up taxes they're actually saving us money elsewhere, so you're the one cheering when they announced the original 2p increase in duty or abolishing of the 10p tax category then?

You have lost me! But why would a cheer when they abolished the 10p tax??? (In fact when that happened i was just finishing uni)

All i'm saying is there won't be any tax cuts in reality, as it will all be clawed back by higher taxes later on. All i'm concerned about is what they do for me of a low wage.

[kalniel]

You have lost me! But why would a cheer when they abolished the 10p tax??? (In fact when that happened i was just finishing uni)

All i'm saying is there won't be any tax cuts in reality, as it will all be clawed back by higher taxes later on. All i'm concerned about is what they do for me of a low wage.

Ok, so you don't moan when they raise tax or abolish 10p rate, because it's not a tax raise in reality?

[AledJ]

<<<lost face>>>

Seems some wires have got crossed here. So i'm just going to leave it where it is.

[aidanjt]

All abord the hyper-inflation train!

[Saracen]

I thought the government did just print money by loaning it from the bank of England using a fractional reserve banking system?

http://en.wikipedia.org/wiki/Fractional_reserve

The BoE just poof's it up out of thin air and it devalues the currency, isn't that why inflation is going so high?

That's a different thing.

In a very real sense, money is just a government IOU. If a banknote is in government hands, it's just so much printed paper. As soon as it's out in circulation, it has a value.

Think about it this way - I print up 1,000 IOU's for £10 each. How much do I owe? While they're in my safe, nothing. But for every one that someone else gets, I owe £10. So why keep 1,000 of them in my safe. Instead, I burn 990 of them and just keep 10. But after I've given a few of them them out, I might be running low, so I'll print a few more.

But how many can I print? Well, how much in the way of assets do I have, and what's my income? If my income is £10,000 a year (and assuming I'm nor spending any of it anywhere else) I can afford to print 1,000 of those IOUs, perhaps to exchange for food, clothes, etc. But if I print more than 1000, well, I still only have £10,000 in Income so the value of those IOUs drops, because I can't afford to buy them back.

Admittedly, that analogy only stretches just so far, but the principle remains. Governments have a level of income (from taxes), and they own certain assets. And they have "reserves", which would be like any deposits I have in a bank. I don't need to have money sitting in my safe to be able to spend it, or have the income, if I have "reserves" in a savings account. just need the bit of paper that says I've got £x,000 in the bank, and I can then draw on it if I need to, perhaps because I've been saving either or a big purchase (buying a car, deposit on a house, building an extension, or whatever).


That's broadly the analogy. The government has reserves, but only the money in circulation (the money supply figures you'll see talked about, or rather one of several M figures) is actually "money". And the government can issue new money from reserves, like I can draw it from that savings account.

But if either I or a government exceed savings, plus revenue from sale of assets, plus income, the result is debt.

And for governments, the "income" if you like, is the Gross Domestic Product of the country. The country earns a certain amount each year, and the growth of that product reflects the financial well-being of the country. For emerging countries (China, India, Brazil, etc) that growth figure can be pretty large, reflecting the fact that they've got a lot of catching up to do, and that they are cheap (by advanced economy's standards) sources of labour and manufacturing ,,,, but as they grow, their own citizens get used to more wealth and get to demand and expect the frills that go with it, and so their economic competitive edge reduces, and eventually, they'll stabilise with about the growth ratesthe rest of us already have .... and someone else becomes the emerging economy.

Think back. Years ago, we saw an emerging Japanese economy (and especially manufacturing, like cars) producing cheap cars because of cheap labour rates, and they undercut us and boomed. But they gained economic strength, standards of living rose and the lost much of that edge and promptly got undercut by Taiwan, which became the new source of dirt cheap manufacturing. And then they got undercut by China, which now looks to be undercut by India, which may well get undercut by the stronger parts of Africa, which will no doubt get undercut by the slower parts of Africa.

Anyway ..... the measure of a country's "wealth" is GDP. That reflects a basic value for the economy. If you just print more bank notes, all that happens is that they are devalued and represent a smaller part of that (fixed, for the year) economic output.

If I've got a pot of gold worth £1000, and I give you a note saying you own 1 share, what's that share worth? If there's 10 shares, it's worth £100. If there's 20 shares, it's worth £50, and if there's 1000 shares, it's worth £1. And if there's 100,000 shares? Well, 1p. And that is what happened in Germany where people used money to paper walls of to burn on fires because the heat was more valuable than the banknote, and it's pretty much what Zimbabwe has done and is doing. Unless the economy is producing the output, all printing money does is devalue the worth of the notes, and you end up needing a suitcase-full, with a nominal value of billions, to afford a loaf of bread.

And that, simplistically put, is the type of reason why the exchange rate suffers when the international markets look at our economy and don't like what they see. It''s also why the government can't just print money. I mean, if it was as simple as printing more of the stuff, they'd have done it. But if they had just done it, nobody would put any faith in it. How much cash would you want to be holding if inflation (a measure of the value of currency against real goods) was 1000% a week? You'd have no faith at all, because whatever you buy buy with it this week would be 10 times what you could buy with the same currency next week. You'd rather have physical goods, because the money would be next to worthless.

And, after all, ALL money is, intrinsically, virtually worthless, You can't eat it, run your car on it or live in it. It has a value ONLY because we believe it does, and because that belief means you can exchange it for real things, because everyone else believes it does too. The exchange rates reflect a weakening belief on the UK currency of international markets.


Nah, G4Z, the government can't print their way out of this. If they have to make public spending, or cut taxes, they can ONLY finance it either from accrued surpluses (and our government don't know what that is) or by borrowing it. And governments borrow money by issuing bonds. You can buy them, institutions can buy them, or foreign investors can buy them. But, typically, they have a limited duration and when they mature, you get back the value of your loan, plus a rate of interest as a return. If I issue you with a bond of my own, it's like an IOU with a specified rate of return ... you give me £100 today and in 365 daysm I give you £108. Or whatever. But, in 365 days, I have £108 to pay out.

It's a loan by a fancy name. It generally carries a low rate of interest compared to commercial loans, because the rate of interest reflects the risk and, for most governments, that's about as safe as risk as you can take. Unless you happen to be the government of Zimbabwe, of course. Guess how keen people are to lend them money (i.e. buy bonds)?

And that is the basic risk our government take, which is what Animus was getting at with that IMF loan he mentioned. It's basically an indicator that a government is in real poop, has borrowed all it can, yet needs more. It is, if you like, the government's lender of last resort, but IMF loans tend to come with harsh conditions which, while probably necessary for any government that deep in the smelly stuff, will nevertheless be painful.

But governments can't just borrow at will. Like a tango, it takes two to form a loan - you need a borrower, but you need a lender, too. And if nobody will lend .....

Suppose a government creates a bond issue, and nobody buys? You won't, I won't, pension funds won't, foreign companies or investors won't? Then the rates will have to rise, because the return-to-risk ratio clearly isn't high enough.



Note: To anyone looking to pick up on the detail of that little lot, I know I've taken a liberty or two with detail and terminology, and analogies only work up to a point. But broadly, it's right.

[burtie]

Well i was going to buy a 28" monitor today with a massive 2.5&#37; off in VAT, i thought it would be nice to save a whole &#163;2.50 off my new monitor, but due to the pound being weak against the dollar the monitor seems to have risen &#163;20 since Friday when i last checked the price, mad innit.

[Bugbait]

Well i was going to buy a 28" monitor today with a massive 2.5% off in VAT, i thought it would be nice to save a whole £2.50 off my new monitor, but due to the pound being weak against the dollar the monitor seems to have risen £20 since Friday when i last checked the price, mad innit.

Exactly, the exchange rate seems to have a bigger influence at the moment. I bought a Dell 3008WFP for £790 ex-VAT at the end of September this year. A few weeks later it reached £870 ex-VAT at the same online reseller and currently sits at £845 ex-VAT. The VAT drop of 2.5% is mostly trivial for anything under a few thousand pounds.

[Andy3536]

The money i save on VAT now will probobly be made up by the 2p added to petrol. It was gonna make little difference anyway.

[arthurleung]

One thing I don't understand is, why make people spend the money?
Since most stuff we buy is imported, wouldn't spending more means more wealth is transferred away from the UK?

[Jagleman]

2.5% - it'll have no effect whatsoever - it's just deflected the fact that other stealth taxes are being thrown at us like 2p on fuel which will stay when VAT goes back up - it's a joke!