VAT and, er, reflation...?

Mr Darling and his Treasury madarins ought to win a Nobel prize in economics, for (unbeknown to the rest of the economists practising and writing today) they seem to have come to the remarkable conclusion that one can reflate an economy by means of reducing VAT by a modest 2%. Yes, the VAT the we all discount as a part of the purchase price of goods and many services. The VAT that we pay at a fixed rate on most purchases, whether they be capital or non-capital goods. The VAT we expect to have no chance of escaping unless we are villainous. The VAT many of us, if we are businesses, reclaim just as we pay in on purchases. So what will the great plan achieve?

Well, think about Christmas shopping for a moment. Last year a report here suggested that the average spend on Christmas presents was £570. If VAT at 17.5% was incorporated in the price of all of the goods bought as presents - unlikely, since at least that selection of jams for Aunt Mabel and little Timmy's new sweater will be zero-rated, as will much else in the £570 - a reduction to 15% would 'save' you £14.25. That's a Kung Fu Panda DVD and a box of chocolates at Tesco. For all of the effort to reflate the economy by the extraordinary measure of VAT reductions, even at the peak of our annual spending the best we can expect is the equivalent of a couple of hours of animated comedy and a handful of caramels and orange cremes.

Now don't get me wrong. It may be worth it - after all, at least Tesco will benefit. But there is no evidence here of targeted thinking in relation to VAT reduction of the type the economy needs and the government seems to believe it is providing. What about a bigger reduction for capital purchases? What about even extending zero-rating for charitable purchases to a more extensive range of capital items? What about extending the idea of reducedVAT on some services that are provided in the main by small firms?

Come on, Darling, think....