VAT rise won’t create a Japan-style slump – but the banks might

One of the things that most worries the ‘must-have-more-stimulus’ crowd about the Budget is the rise in VAT from January. It will, they say, tip the economy over the edge. Next thing we know, we’ll be back in recession.

The critics point to Japan as an example of how the nightmare of rising consumption taxes unfolds. There, in 1997, the tax rose from a mere 3% to 5%. The economy subsequently shrank in four of the next five quarters.

I say subsequently rather than consequently for the simple reason that there is little evidence the two were particularly connected. As Graham Turner of GFC Economics points out, the Japanese economy had been slowing for some time before the tax actually rose. And the country’s financial crisis was already “palpably intensifying”, with a number of finance companies having just failed or being publicly on the verge of failure.

At the same time, a big land auction in Tokyo had just failed (falling land and property prices were at the core of the Japanese financial collapse, just as they have been in ours). Worst of all, one of Japan’s big insurers had just defaulted – the first to do so.

All this “arguably had a far greater impact on consumer confidence than the hike in consumption tax.” The UK may well end up back in recession. But if it does, I don’t think it will be the rise in VAT that puts us there. Just as it was in Japan, it will be the next leg of the banking crisis.

  • p.helix

    In Japan a rise of 2%, in this c ase 3% to 5% is over a 60% rise..

    In the UK, a rise of 2.5% from 17.5% to 20% is relatively only 14.29% rise.

  • DST

    p.helix…..the figures you quote aren’t particually relevant. Whats is relevant is the difference to the price of goods, assuming retailers don’t swallow any of the rise.
    In Japan it would have added about 1.94% to prices, whilst our rise will add 2.13% to prices.
    Over all though I agree with the article.

  • Alex

    What happened to the LibDems pre-election promise to level the VAT playing field between new build houses ( VAT exempt ) and upgrades / extensions to existing houses ( VAT’able ).

  • Tony

    It is to be hoped that the increase in the value of sterling goes some way to mitigate the increase in value added tax.

  • Jim

    Personally I was not to surprised about the VAT rise, although I thought luxury goods would have been affected as well but there you go.

    By the way the subject was treated it sounds as if the rise is permanent but would it only apply until the deficit is under control and the massive overpaying has been paid down?

    In which case VAT would decrease when all these borrowings have been paid.

    Why does the expression “in your dreams” apply here.