Merryn Somerset Webb

Rising VAT won't cause a double dip: the banking crisis will

One of the things that most worries the must-have-more-stimulus crowd about the budget is the rise in VAT from January. It will they say tip the economy over the edge and next thing we know we’ll be back in recession. The critics point to Japan as an example of how the nightmare of rising consumption taxes unfold. There in 1997 the tax rose from a mere 3% to 5%. The economy subsequently shrank in 4 of the next 5 quarters. I say subsequently rather than consequently for the simple reason that there is little evidence the two were particularly connected. As Graham Turner of GFC Economics points out the Japanese economy had been slowing for some time before the tax actually rose and the country’s financial crisis was already “palpably intensifying” with a number of finance companies having just failed or being publically on the verge of failure. At the same time a big land auction in Tokyo had just failed (falling land and property prices were at the core of the Japanese financial collapse just as they have been of ours) and worst of all one of Japan’s big insurers had just defaulted – the first to do so. All this “arguably had a far greater impact on consumer confidence than the hike in consumption tax.” The UK may well end up back in recession but if it does I don’t think it will be the rise in VAT that puts us there.

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There's no such thing as a one way bet

The general consensus is that after dumping its peg to the UK dollar the Chinese yuan can only rise. But what if it didn't? What if it fell instead? 

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George, just keep it simple

I rarely find myself  wanting to be a  politician – or to stand  in the shoes of a politician – even for a second. Not so today. Right now, I’d like – for one week and one week only – to be George Osborne.

He has just received spectacular news from the new Office for Budget Responsibility (OBR). The overall deficit (the amount we add to our national debt every year) is not quite as big as it was thought – it is forecast to come in at £155bn for 2010-11 rather than £163bn. So that’s good.

At the same time, growth forecasts for the next few years have been cut hugely and the OBR says that the long-term structural deficit (the amount we spend above and beyond our tax revenues even when times are good) is much larger than expected. This is also excellent news for the Chancellor.

Why? Because it gives him a platform from which to announce a really bold and creative emergency Budget – a once-in-a- government chance to make major changes.

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Where are all the first time buyers?

There has been much talk recently of the rise in the number of mortgage products available to those with small deposits. But the existence of these products is beginning to look rather more theoretical than actual. If they were really being granted to borrowers rather than just trumpeted in the press you might expect to see the number of first time buyers entering the market rising for example. But you aren’t seeing any thing of the sort. 

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Non jobs in the public sector: can we get rid of them?

I went on the Today Programme last Saturday along with several other regular contributors to give one money saving tip to our new government. Mine was to do with pensions. You can read the full argument in the piece below. But the core idea is pretty simple – to cut the amount we allow people to save into a pension to an amount that allows them to save enough to prevent them from being a burden on the tax payer in their retirement and no more. Obviously they can still save as much as they like outside a pension – just not in such a way that it is subsidized by the taxpayer. I suggested cutting the amount everyone is allowed to save every year to a not exactly mean £20,000 something that could save £6-7bn a year. Some of the other speakers came up with slightly more radical ideas (Simon Jenkins thinks we should dump the armed forces in their entirety) and some rather less radical. But when I then looked at the next day’s Sunday Times I began to wonder why we were bothering with the out of the box thinking at all. Why? Because the paper listed a horrible train of non jobs still on offer in the public sector at vast salaries. 

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