The biggest economic news in the UK currently is the highest ever rate of VAT - the sales tax. It has just risen 2.5% to 20% (from a steady 17.5%). However, the impact that this will have is actually entirely unclear.
Its big news because the general public, the consumer, appears to be directly affected by it. It is true that the price of some goods, notably those with a low profit margin such as TVs and other electricals, will immediately rise. However the majority of goods have relatively high profit margins. As companies are only just feeling recovery post recession they are unlikely to risk profits by forcing the consumer to absorb the increase. Having worked in retail for the last few months I can testify for this - within the company I work for prices will rise steadily over several months.
On the flip side it's unclear whether consumers will actually significantly reduce expenditure due to the rise. When VAT fell in 2008-09 to the lowest rate it can - 15% - consumer spending did not significantly increase. It seems that despite initial excitement the VAT is little noticed by consumers. And the pre-rise post-Christmas shopping rush only served to further the recovery of the retail industry.
It is unclear whether a rise in VAT will increase government income by 13 billion pounds as suggested by the Chancellor. However in these economically fraught times every strategy has to be exercised to its best ability.
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