VAT reduction to 15%

From Monday 1st December VAT will be reduced from 17.5% to 15%. I was very surprised at this move because historically VAT has always risen with time. Rumours were circulating in economics circles that a VAT rise to somewhere between 18% to 20% was on the cards and would be implemented before 2010. I remember back in 1991 when Norman Lamont increased VAT from 15% to 17.5% whilst Britain was in the grip of a recession and fall in consumer spending. Now Alistair Darling implements the reverse although I suspect it is more of a populist policy rather than an economic strategy intended to raise support for a Labour party that is deeply unpopular with the electorate. Another possible reason is that our zero VAT rating on food, books, newspapers, children's clothes, transport fares, and water bills is supposed to come to an end in 2010 under an EU directive. These items will have VAT charged on them at a minimum rate of 5%.

It comes as a pleasant surprise although reading between the lines tells me its more of a sweetener and populist stunt than anything else. An increase in consumer spending resulting from lower prices will mainly be on imported goods so will be of little benefit to our economy. Most of the things which are rising in price faster than inflation such as food, utility bills, council tax, and train fares don't have 17.5% VAT on them anyway so prices won't go down.