Do We Really Need the VAT Hike?

Osborne’s budget has convinced the bond markets that this coalition is serious about tackling the deficit. The rally in gilts since the election and budget has been strong, taking 10-year yields down from 4% to 3% in three months, bringing down long term borrowing rates for mortgage holders and capital hungry growth businesses alike.

There has at the same time been a slew of negative-to-soft data on the economic front, given that the deficit cutting credibility of the government is firmly established, to the nigh on elation of the bond markets, Osborne has now earned a bit of leeway. Having already achieved fiscal credibility, if we do get more soft numbers on the economic front, he could afford to suspend the VAT hike due in January. If he goes ahead with the VAT hike and we do see a double-dip, Ed Balls will be well justified in blaming him for adding to the woes of the consumer. The VAT hike will take £13 billion of spending out of the economy.

David Smith, chairman of the Shadow Monetary Policy Committee group of independent economists, says his budget model calculates the move could increase unemployment by 235,000 over the next decade and reduce GDP by 1.4% over the same period. Do we really need to be reducing GDP at this time? The fiscal flagellation is no longer required to appease the gilt market…




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Quote of the Day

David Cowling, the BBC’s head of political research, in an internal memo…

“It seems to me that the London bubble has to burst if there is to be any prospect of addressing the issues that have brought us to our current situation. There are many millions of people in the UK who do not enthuse about diversity and do not embrace metropolitan values yet do not consider themselves lesser human beings for all that. Until their values and opinions are acknowledged and respected, rather than ignored and despised, our present discord will persist. Because these discontents run very wide and very deep and the metropolitan political class, confronted by them, seems completely bewildered and at a loss about how to respond (“who are these ghastly people and where do they come from?” doesn’t really hack it). The 2016 EU referendum has witnessed the cashing in of some very bitter bankable grudges but I believe that, throughout this 2016 campaign, Europe has been the shadow not the substance.”

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