Analysis from the advisory firm Deloitte suggests that assuming that the full 2.5% cut in VAT announced in today’s Pre-Budget Report is passed on to consumers it will take just 53p off a typical £50 shopping basket.  Based on a typical supermarket shopping basket the total price would go from £50 to £49.47.  This reflects the fact that lots of food items which do not attract VAT would be part of an average shopping basket.

Daniel Lyons, Indirect Tax Partner at Deloitte, said: “It is difficult to see how this measure is going to encourage increased spending when the amount of money being saved by the consumer is likely to be so small.”

The 2.5% cut in VAT would also result in relatively small reductions in the price of higher value consumer goods.  For example, a £550 flat-screen TV would cost £11.62 less with the new cost being £538.38.  Shoppers buying a new £300 washing machine would save £6.38 with the new cost being £293.62.  Somebody wishing to buy a new Toyota Prius would save around £375 on a £15,000 car.

Lyons added:  “Even on big-ticket items, it is questionable whether the level of savings would be high enough as to attract new purchases.”

The VAT cut will save the average earner, receiving an annual salary of £25,000, around £170 per annum.  This is calculated by estimating annual income after tax and National Insurance Contributions as £20,000 and assuming that over half the income goes on items without standard rate VAT, ie housing, food, utilities, insurance, council tax.

Ends

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms.  Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ("DTT"), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other's acts or omissions.  Services are provided by member firms or their subsidiaries and not by DTT.  Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.