The budget

So that was Labour's big 'save the world' emergency budget, and what do we get? More tax on booze and fags, because Labour are a bunch of puritanical despots that hate pleasure.

The big, and heavily trailed, announcement was the cut in VAT down to the minimum allowed by the EU. Not that this is actually going to have any visible effect at all.

A product enters the supply chain. They sell it another firm for £1.4 + 0.25 VAT, who then claim back 0.25. This second firm sells it on to a third firm for £1.5 + 0.26 VAT and this third firm claims back 0.26. The third firm sells it to the public for £1.69 + 0.30 VAT because £1.99 is an important price point.

A product enters the supply chain. They sell it another firm for £1.4 + 0.21 VAT, who then claim back 0.21. This second firm sells it on to a third firm for £1.5 + 0.23 VAT and this third firm claims back 0.23. The third firm sells it to the public for £1.73 + 0.26 VAT because £1.99 is an important price point.

The VAT is claimed back all the way up the chain. Because VAT was supposed to be like a sales tax, a horrifically bureaucratic and complicated one that is prone to fraud. Like everything else the EU does. Reducing it will be good for cash flow of most firms in the chain since they will not be having to wait to claw as much VAT back from the treasury, but it will do nothing to the bottom line. It will be good for the end retailers (like Labour's last big donor, Lord Sainsbury) because they are able to get a bit more profit, but it will be invisible to the customer for lower value items because there are certain psychologically important price points.

However there is also also going to me more tax on fuel and since the product will need to be moved between all of these firms that is going to increase the costs of the entire supply chain reducing their bottom lines. Cash flow might be easier but the only place it will be flowing is right out the door.

That won't be the only thing heading for the exits. 5% more tax on people with enough money to move country, that such help to fix the Irish property crash then. Perhaps Gordon is banking on these high earners tipping their staff as they leave? They better keep quite if they do get slipped a few fivers, or perhaps a few wheel barrows of fivers once the effect off all this extra debt filters threw into the currency markets, because Gordon plans to have that as well increases in employees and employers National Insurance, aka Second Income Tax and Employment Tax. Yes, they increased the tax on employment to help people weather the recession.

This is all justified by the need for some Keynesian reflation, despite the inflation rate having been above the target level for quite some time and real inflation, rather than Gordon's made up numbers, has been higher still. Of course had they been proper Keynesians they would have been reducing the levels of debt that the government held during the good years to make it easier to finance the counter cyclical splurge when the inevitable correction came. However Gordon Brown had abolished boom and Bust so that was not needed since there would be continous growth for forever more, the lion would lie down with the lamb, and Heathrow's new runway would be used excusively by pigs.

If this was Labour's big bribe for an early election in order to minimise the size of their defeat then they have blown it. No single budget was ever really going to turn around fall out from the bursting of the giant property bubble that has been inflating in this country for years, but this has been a complete damp squib. Gordon will be dragged to the polls in 2010 and his party anhilated. David Cameron will be next Prime Minister but it is going to take decades to clean up the mess that Labour have left behind. One can only hope that Labour are beaten so badly that they are out of power for long enough. It isn't just the economy that he has to fix though, he must also do something about the systematic destruction of liberty Labour have been undertaking. That could well take even longer given how hard it is to get a politician to give up meddling and devolve power downwards. Maybe the first of the inevitable cut backs to try and balance the governments budget can be on ID Cards and Labour's Stasi databases.

UPDATE

The Daily Mash has a great take on it.