That’s the message behind Alastair Darling’s speech today. Announcing that VAT will drop to 15% until 2010 is similar to saying that the whole country is having a 2.5% off sale, at the government’s expense.
Hooray!
Except that of course all government money is ultimately tax-payers’ money, and that either means tax raises or debt. In this case it’s debt, £118 billion. He may only drink water at the dispatch box, but Alastair Darling is basically avoiding a hangover by having another whisky.
The reason for these extreme measures is that you and I are the only people who can prevent the economy from sliding into recession. That’s because Gross Domestic Product, the report card for any modern economy, is calculated like this:
Domestic Product = Consumption + Investment + Government spending + (exports – imports)
We’re not renowned as a nation of savers – the average UK adult now owes £30,440, so personal investment isn’t adding much to GDP. The UK also runs a trade deficit, which means that it imports more than it exports, generating a constant loss on that front. The government spends considerably more than many others, but the largest contributor to the GDP formula is always private consumption – consumer spending. Depending on who you listen to, consumer spending accounts for 65-70% of the UK’s GDP (70% in the US).
If we stop buying houses, cars, holidays and ipods, growth dips. Like this:
Now, the role of consumer spending is a little more complex than that in the actual economy (GDP is somewhat artificial), but our GDP will suffer if we don’t get out those credit cards and hit the shops. If we won’t take on the debt, the government will, just as long as those tills keep ringing. This is an unsustainable way to run an economy.
How about we let GDP go? What if we don’t grow this year? What if we stop growing full stop, and fix any inequality through redistribution instead? Recession will mean bankruptcies and job losses, but if the supposed answer is only to prop up prosperity by delaying the inevitable, then the system itself is broken.
This Saturday is Buy Nothing Day. You know what (not) to do.
The Earthbound Report 
I am actually thinking of going down to Oxford Street on Saturday and take pictures of any VAT-reduction activity that might be taking place. Or maybe Westfield shopping temple..!
VAT-reduction-related I meant..! 🙂
The powers that be must know the whole system is unsustainable. It seems like this is a panic attack type reaction. What do they expect will happen when the bubble bursts?
And Jeremy, as you’re far better read on the subject than me, how are other countries handling the situation? Are they considering ‘forgetting about the GDP’? Has anyone done it already? What are LEDC’s doing about/how are they affected by, the global, finacial, crises meltdown?
Alistair Darling’s remedy is simply to prescribe more of the medecine that has got us into this dire situation in the first place. Someone, some day, is going to have to pick up the bill. It will be unimaginable, and life will never be the same again. Would that be a bad thing?
There is only one country that has abandoned economic growth as the final arbiter of development, and that’s Bhutan. Instead of GDP, Bhutan has GDH – gross domestic happiness. This is calculated as a combination of equitable economic development, environmental sustainability, preservation of culture, and good government. They’ve been following this four-fold path since 1998. When they first started it was dismissed as naive, but plenty of people have taken note since. David Cameron, in fact, is the latest politician to suggest we need to look beyond GDP.
The New Economics Foundation (www.neweconomics.org) are the most useful group on this, with their experimental work on alternative indices.