VAT crisis?

At the time of the 'Emergency' budget, the Chancellor of the Exchequer, George Osborne announced that the VAT rate on standard rated goods would rise in January 2011 to 20%. Without missing a beat there followed the predictable shouts of horror and predictions of gloom from among many in the retail industry. On 23 June in the Retail Bulletin there was a note saying that 81% of UK retailers believed that the Government would increase VAT and that if this were to happen then disaster would be manifest.

The costs of changing the rate in practice on the shop floor price indicators was cited as one of the major and most costly difficulties with the suggestion that one in fourteen retailers would slash jobs being another. These rather horrifying predictions were dumbed down a bit post-budget with the BRC amongst others saying that the retail industry did not want the rise but realised that the Government had no easy options - but jobs will be hit, consumer spending will be hit and these would contribute to a slowing of the pace of recovery and also fuel inflation. OK, so now that the dust has settled, the VAT increase will be with us in six months time; what is really likely to happen?

Clearly there is no precise model on which to base a fully reasoned appraisal, and it is entirely reasonable to suppose that the rise will have some effects. The effects on the retail industry concerning the implementation are real, there is always a cost when the standard rate of VAT is altered, but any retailer will tell you that a rate change is a real possibility at every budget and this risk therefore ought to be part of every retailers normal risk management strategies with their sytems geared up to enable a cost efficient rate change implementation. If it really is so burdensome that the implementation would take months, as some have suggested, then their systems are either poorly devised or badly executed.

Losing jobs is an emotive threat. I don't doubt that there will will be implications for jobs in some sectors, but mostly those firms who lay people off will be doing so for reasons of corporate efficiency rather than merely the impact of VAT rises - I have seen no arguments put forward yet that are not open to serious question except the more general trend arguments that the rate rise will impact on discretionary spending and that this and related issues may depress the levels of trade in the short term sufficiently to warrant reductions in overall staffing. Even with these though, the most efficient of firms will be able to withstand the impact with perhaps the need to minimise hours worked rather than actual job losses.

It is easy to understand why the government has decided to take this step, and it is only the cynic deep inside me that believes that at least part of this has been to provide the government with a wonderful tool to use towards the next election - the announcement that the fiscal measures taken by them have been gloriously successful and they are now able to reduce the rate to say 17.5%, which will be hailed by all as a miracle - and will, I guess, promote far fewer complaints by retailers about the costs of implementation than the rate rise has done.