Additional Problems For The Darling Plan
Spending in the shops, however, is on the slide. An upward spike in food costs has meant household food bills shot up in the second half of this year, leaving less to spend on non-food items any-way, even before recession-prompted thoughts of spending less kicked in.
Because of this, the VAT giveaway will probably be less than forecast.
Then there is the question of what consumers will do with what they have saved on their purchases which, according to government estimates, should be about £250 a household. The problem here is that households are labouring under an unprecedented burden of debt – currently about £10,000 of credit card and loan debt each. And since everyone knows a job-destroying recession has set in, any fuel efficiency or VAT savings made are much more likely to be spent on reducing debt rather than going out to spend.
But where the sums do not add up is in his belief that the recession will end by next summer and in autumn the UK economy will return to a growth track.
Economists call this a v-shaped downturn – a sharp fall in output followed by an equally sharp rise. But much more likely, given the probability that the £20 billion "stimulus" will not have the hoped-for effect, is a u-shape – a sharp fall, followed by a period of no growth and then eventually an upturn. In that case, the tax increases will not produce the predicted revenue and, even worse, they may kick in while the economy is still in recession.
Inflation, or rather the lack of it, also causes a problem for Mr Darling.
Governments often increase their tax revenues by doing nothing. If inflation is running at 3 per cent and pay awards are at the same level, governments can raise their revenue from income tax by keeping rates and allowances at the same cash levels.
Although inflation is now relatively high at 4.5 per cent, it is falling fast and some believe it may even hit zero or turn negative into a period of falling prices or deflation. And if that happens, Mr Darling's sums certainly won't add up.