The UK’s Finance Minister, Alistair Darling, was the first western leader to warn that the current recession was the worst in 60 years. He was also the first to effectively nationalise major banks, to stave off their collapse. Now he has become the first to try to tackle the real threat of deflation, by cutting sales tax (VAT) by 2.5% to 15%.
The real problem with deflation is that it rewards buyers for postponing their purchases. Why buy today, when it will be cheaper tomorrow? We are already seeing the impact of deflation at work on chemical sales, and the results are not pleasant.
Darling’s £12.5bn (€14.6bn, £18.8bn) VAT initiative is an attempt to tackle this specific problem, by offering a temporary tax cut that will expire at the end of 2009. As such, the blog welcomes the move. But unfortunately, £12.5bn may well prove too small an amount to counter the deflationary danger that Darling has correctly identified.