VAT's life

Everyone you talk to in retail is now planning ahead for when VAT goes up, rather than if it does. Of course no retailer welcomes tax increases, but there is a level of resignation to it and certainly not the indignation which there was surrounding the proposed National Insurance rise.

The reason retailers are resigned to it is that everyone recognises that the government is going to have to take strong action to tackle the huge public sector deficit. When VAT went back up from 15% to 17.5% in January after the one year cut the previous government made to stimulate the economy, in truth it didn’t make much difference and sales have held up pretty well through early 2010. That’s not to say it won’t be without pain, but a small increase in VAT could be the least bad option for the new government.

If there is a rise there are things the government can do to mitigate the impact. Firstly, it would make more sense to increase the rate on those goods which are currently VAT-able and not extend it to other categories, notably food, which would have a severe impact on the poorest in society and have a big knock-on effect on their discretionary spend.

Secondly, time it sensibly. Don’t change the rate during peak Christmas trading, or on January 1st, as the previous government did. Give the industry warning that it’s hapenning and time to prepare themselves and their suppliers.

Thirdly, do it as part of a sensible package of measures and make sure the baby isn’t thrown out with the bathwater. A 2.5% rise in VAT won’t on its own kill consumer confidence, but George Osborne needs to be careful that his programme of austerity measures aren’t so severe that shoppers are scared stiff and stop spending completely.