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Tuesday, November 25, 2008

Rearranging The Deckchairs on The Titanic

Alistair Darling delivered his pre budget report yesterday, which in theory was designed to ease the pain of the recession.

However, at best it can only be described as tinkering with palliatives in the short term with painful costs in the medium/long term.

A cut in VAT from 17.5% to 15% will have little effect on demand, as stores etc are already offering 20% discounts; indeed it is considered likely to cause more administrative hassle than it is worth. Darling needed to cut VAT by more than this, were it to have any significant effect; regrettably the EU has placed a lower limit on VAT of 15%.

Darling made a number of predictions about growth, or rather "shrinkage", he estimated that it would be at worst - 1.25% next year and forecast that the economy would recover in 2010, with growth of 1.5% to 2.0%.

Given the Treasury's wildly inaccurate growth forecasts in the past, quite why anyone would believe these now is beyond me.

Darling offered a number of fiscal stimuli, mainly related to bringing forward government spending on roads etc and putting off planned tax rises until later.

None of these will "stimulate" the economy much, and given the fact that everyone has had due notice that taxes will rise (eg national insurance) they will not loosen their purse strings.

All in all these palliatives will have little real positive effect, and most likely will be more trouble than they are worth as Darling has added more complexity to an already complex tax system.

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