Wednesday, January 12, 2011



Is my memory going? I am intrigued at the media reaction to the VAT increase from 4 January 2011. It seems that there is a serious risk that this will destabilise the economy, lead to mass unemployment and push the country into recession.

What puzzles me is that a year ago VAT increased by 16.67% from 15% to 17.5%. At that time the economic situation struck me as far more risky. If the current 14.29% increase from 17.5% to 20% is as damaging as the media tell me, surely the earlier increase ought to have been far more damaging as it took place at a time when the economy looked far more fragile. In fact it seems to have had little, if any, impact on the economy. So why should the latest increase be any different?

What I find equally puzzling is that I cannot recollect widespread warnings of doom in the media at the end of 2009 similar to those at the end of 2010. My recollection is that it was generally accepted that the increase to 17.5% would not be damaging. So if a 16.67% increase was not thought damaging, why should a 14.29% one be so much more disastrous? After all in January 2010 the effect of a VAT increase was unpredictable, as we had not had one for many years. In January 2011 we had the experience of 2010, which was that the increase did not seem to have had any impact on the economic recovery.

But the media – and those trade associates which have berated the increase – seem to have wholly ignored this experience. I do not understand why. I would have expected the doom-mangers to have differentiated this year’s increase from last year’s and explained why the experience of 2010 is not an appropriate pointer to what is likely to happen in 2011.



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