By Michael Baxter
A lisping Meat Loaf would have got it right. We don’t like VAT.
But what about VAT and the economy? You may remember one of Mrs Thatcher’s big ideas when she moved into number 10 was to hike VAT. Many thought it was a crazy idea; that runaway inflation would result, but it didn’t.
You may also recall that one of Alistair Darling’s big ideas, when he moved into number 11, was to cut VAT to try to create more demand across the economy. His plan sort of worked — the UK came out of recession, but there is one big downside to cutting VAT, and that is… what is it now?… oh yes, that’s right, government receipts plummet.
But in Japan, think opposite. You may have read about Shinzo Abe and his three arrow approach to kicking life into Japan’s economy. Arrow one is government stimulus, arrow two is massive quantitative easing, and arrow three relates to creating a more flexible labour market. But actually, there is a fourth arrow too. Next year Japan’s consumption tax is due to rise from 5 to 8 per cent.
Abe wants stimulus and austerity — via the hike in consumption tax — at the same time. The UK Labour Party has been calling for a temporary cut in VAT.
Who is right? Assuming the Abe government goes ahead with its consumption tax plans next year, we will know whether the Abe approach worked before the next UK election. This is a unique opportunity to apply near scientific test conditions to see whether the Labour approach is appropriate.
Michael Baxter, Editor of www.investmentandbusinessnews.co.uk and author of the Blindfolded Masochist. If you want to contact Michael, you can email him on firstname.lastname@example.org