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Thursday, December 30, 2010

Have we made the recession worse by choosing the wrong number? 20% VAT and the perception of pricing.

Petrol retailers had to endure some anguish a year of so ago when price per litre hovered just below £1.00. There was something about the magic pound that provided a brake on suppliers, before they lifted the price through the bar. Now at £1.30 there is no holding back until £2.00 beckons.

Moving to Open All Hours-speak there are some further lessons for us. Price labels can be an irritation but none more so than £4.99. The shop assistant is forced to open the till, issue the change, record the transaction and a discentive for employee theft is created. The more cynical observer will observe that the pricing strategy, lulled the purchaser into forgetting that the bill is a penny short of a fiver, and the £4 dominates the perception of the sale.

In that context, the impact of the VAT change to 20% is worth a second look. In the hurly-burly of a financial transaction,a mental calculation with 17.5 percent does not come easily. Conversely, there is a certain ease in working out 20%.

We are handing over a fifth of the price as a tax. We can visualise a fifth of a cake and it is a big slice. That fifth will go around in peoples' head and the outcome is predictable - an encouragement to spend wisely and less. What chance an economic recovery then?

When the Treasury staff advocated a tax increase, I am sure they knew demand would be squeezed. I wonder whether they could have made a better fist of it, if they had chosen 19.5 or 20.5%. Then the public would have been stymied by the mental arithmetic.

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