3.12.08

VAT

Walking down the street to Tesco
I noticed that many shop windows advertised
action regarding the recent lowering of the VAT.
I even got a text from O2 saying that
they would give me back a few pence with
each top-up because of the VAT policy.

This all made me think of Robert E. Lucas'
assertions on rational expectations. I wrote about
this not too long ago in my macroeconomics essay
for uni, and it was a really interesting concept to me.
According to Lucas, rational expectations negated
fiscal policy actions because humans were not
so easily fooled by the policies and continued
to act according to the reality of the economy.

For example, the government may put forth policy,
such as the lowering of VAT in order to make things
cheaper, which using Keynes' model they expect
to stimulate spending in the economy with a multiplied effect.
Nonetheless, people are not imbeciles,
they do not just see the lower tax rate and
say "Ooh, I think this means I should go on a shopping spree!"

The present situation of Marks and Spencers
is a testament to the ineffectiveness of the fiscal policy:
"The swift repeat of the M&S sale day suggests that
high street stores have seen little impact in their tills
of this week's 2.5 percentage point cut in VAT."
-So good it is doing it twice The Guardian 3 Dec 2008.
(see the article here)

Particularly in the current situation, the news of
the credit crunch and recession have been so
widely discussed that all are aware of it.
Therefore even though people know that they will
save a few pence on their groceries, they are not
going to drastically change their spending habits
because they know that the economy is not looking good
in the near future so they must be cautious.

In any case, what is so wrong with being cautious?
There is a atrocious amount of debt in developed countries
from the excessive use of credit cards. Perhaps
people should take this opportunity to give their
credit cards a rest and have a lesson in saving.

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