Liar, Liar, Pants on Fire.

So, did you believe the Chancellor when he told us he was cutting tax to stimulate the economy.  If you’re a motorist, or you buy things in shops, you shouldn’t believe him.  This is why…

Currently (according to the cheapest petrol where I live is 89.9p/litre

Removing the current VAT from this to get a “basic cost” – which includes the current fuel duty…

89.9 / 1.175 = 76.5

Add the 2p/litre the chancellor is increasing fuel duty by:

76.5 + 2 = 78.5p

Add the new VAT

78.5 * 1.15 = 90.2p

Not much of a tax cut, is it?  Now, that doesn’t take into account 2 extra factors – one, that the base price of the fuel (78.5p) includes the cost of moving it around the country in big heavy tanker lorries, and two, the operators of said lorries don’t pay VAT on their fuel (or, more accurately, they reclaim the VAT) – so the base cost of the fuel has to increase to account for the 2p/litre increase in the fuel used by the tankers.

Garages will no doubt either absorb the tax increase at the pump, or will round it up to the next penny and pass it on to the motorist.

Also, the government won’t be dropping the fuel duty when the VAT goes back up at the end of 2009…  cha-ching!

The same applies to retail, although VAT is dropping, don’t expect to see all of that cut passed on – for 2 reasons – increased transport costs, and more importantly, most retailers will have already produced their Christmas advertising, complete with prices, especially for the printed media, which has a several week lead time.  Changing all the signs, leaflets, posters etc will cost money.  That money has to come from somewhere  – guess where?  That’s right – the price the products are selling for.

Anything which is non-VATable will likely increase in price thanks to the fuel-duty increase.  Yes, income tax will drop a little, yes, shop prices may drop a little, but it’s nowhere near as much as you probably think.