UK cuts sales tax to fight deflation

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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.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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