Politics and Economics (and Pasties)

Looking back on 2012, I think it would be fair to say it was a fairly difficult year for the government’s economic credibility. No economic growth, no deficit reduction, a double-dip recession etc. There is one economic government policy however, that stands out from all of the rest and this is a blogpost about that one. Let’s begin.

At the start of 2012, the Conservatives and the Labour party were polling fairly closely but following the announcement of the government’s “Pasty Tax”, Labour shot into a massive lead, which they have held pretty consistently ever since.

If you are a regular reader of this blog, you might guess what my thoughts are on the “Pasty Tax” – yes, that’s right. In a year that the government spent creating and then stepping in huge economic cow pats, this one stood out for being… a good idea.

To see why I think it was a good idea and why it was ultimately scrapped we need to look at both the economics and the politics.

Economics

The phrase “Pasty Tax” was coined by the media to describe the closing of a tax loop-hole that meant certain foods were sometimes liable for VAT and sometimes exempt from VAT depending on the temperature at which they were stored in the shop or sold to the consumer. Under the previous policy if I had gone into a shop and bought a sausage roll, VAT would be charged as follows:

• If I bought it cold and heated it up myself – exempt from VAT
• If it had been cold when I went in and the staff heated it to order – exempt from VAT
• If it had been kept warm in a cabinet under heater lights – liable for VAT
• If it had been kept warm in a cabinet under heater lights but taken out of the cabinet when I ordered it and allowed to go cold before I bought it – exempt from VAT

I mean, seriously, whoever thought of that system? It is completely ridiculous. It is in no way unique though. In the UK VAT is charged on biscuits but not cakes – so the eternal question, “Is a Jaffa Cake a cake or a biscuit?” ended up in court. Wikipedia summarises it and links to the sources nicely:

In the United Kingdom, value added tax is payable on chocolate-covered biscuits, but not on chocolate-covered cakes.^[12] McVities defended its classification of Jaffa Cakes as cakes at a VAT tribunal in 1991, against the ruling that Jaffa Cakes were biscuits due to their size and shape, and the fact that they were often eaten in place of biscuits.^[13]McVities insisted that the product was a cake, and according to rumour produced a giant Jaffa Cake in court to illustrate its point.^[13] After assessing the product on eleven criteria, including “texture”, “attractiveness to children” and “consistency when stale”,^[14] the court found in McVities’ favour, meaning that VAT is not paid on Jaffa Cakes in the United Kingdom.^[12]

Now I can understand that there are often reasons for charging more or less tax on certain products. My job means I often have to fly somewhere in an aeroplane. Aeroplane travel is damaging to the environment though so I can understand the reasons that my flights incur a high tax. When the government taxes something then people will use it less, so the higher the tax is the less inclined my company will be to send me somewhere. They might decide that, given the costs involved, we should do a video conference instead.

The examples discussed above are in no way related to giving people sensible incentives though. Although it is cheaper for me to order my sausage roll and wait for it to go cold before paying for it, exactly what incentive is this policy trying to create? I have a cold sausage roll and the government has no tax revenue. Is that the outcome that the government is trying to engineer? No, of course not. Therefore closing this loop-hole was a good economic policy.

Let’s have a quick glance at VAT on heating your house. VAT on gas and electricity is 5% rather than the standard 20% applied to most other purchases. This makes heating my house much cheaper than it would be if gas and electricity were taxed at the standard rate. Using gas and electricity though is not something that we want to encourage so why in the world would we want to give it a tax break?

Let’s move on to the next subject.

Politics

It turned out that the government’s one good economic policy of 2012 was so unpopular that they quickly reverted to economic incompetence and abolished it. The Pasty Tax was scrapped and we retained the existing bizarre set of rules and incentives. But why was this?

The answer is that, although it was economically good, it was politically bad. The media got hold of the policy and reframed it as a tax by the nasty party on pasties, which were, as we learned, the quintessential sustenance of the working classes.

Now I doubt you will ever meet anyone who spends their free time being more disillusioned with politicians than me but even I found the next chapter in this story funny. First Ed Miliband and Ed Balls rushed down to the closest Gregg’s, news teams in tow, to show how much the Labour party liked pasties:

Ed & Ed out pasty shopping

I like this photo. Ed Balls has even taken off half of his jacket in order to look more working class.

Anyway. David Cameron and George Osborne then found that the only sensible political response was to show that they liked pasties even more than Ed and Ed. Cameron waxed lyrical over his last pasty – which it subsequently turned was from a shop in Leeds station that hadn’t existed for five years. Still, no better time to put things right:

I like pasties more than Ed Miliband

I like pasties more than Ed Balls

With no clear winner, the cabinet then challenged the shadow cabinet to a pasty eating competition to decide who liked pasties the best. Labour was initially bullish but their advisors then realised that they’d be taking on Eric Pickles and it would be akin to playing the cabinet at football with Lionel Messi as Foreign Secretary.

As it was then, we never found out which party liked pasties the best and shortly afterwards the government made a U-turn on their only sensible economic policy of 2012 and renounced the Pasty Tax.

Politics & Economics

What is actually going on here is a clash between politics and economics. The two often don’t agree and when they don’t the government always favours the former over the latter. Although economically it is far better to have a sensible VAT system without odd, unexplainable loop-holes; politically it is harder to explain. Predictably the policy was dropped.

Sometimes I meet someone and when we’re discussing things they say that they studied “Politics and Economics” at university and I think, “Shit! That must have been confusing.”

I imagine them in their finals, sitting down in the morning to their economics paper and seeing the question, “Should VAT be set at the standard rate for gas and electricity?” and them having to say “Yes!” then going to their politics exam in the afternoon, seeing the same question and having to say, “No! We’d kill all our pensioners!”

And I am sure that some of you reading this will be saying that this is all well and good but if we put VAT up on heating our homes we will kill all our pensioners. Well, this is where we can use economics to trump politics. If I get more tax revenue from everyone then I can use some of it to pay more in benefits to the poor and old. I can make it so that a pensioner’s increase in income is equal to what they lose on heating their home. By doing that the pensioner doesn’t lose anything and the government still gains overall.

I am in full-time employment but at the moment I pay 5% VAT if I switch the heating on and I pay 20% VAT if buy a jumper. This is not a tax policy that encourages sensible behaviour.

Sadly we live in a society where politically good things always better economically good things. It’s not just economics though, health, eduction, the environment and everything else is subject to politics over sensible policies.

So what should we do? I would like to live in a society where the government chooses to implement sensible policies and makes a big effort to explain why they were sensible so that we have a foil to the propaganda of The Sun and The Daily Mail and politics and sensible policies became aligned to the same things.

Sadly I see little prospect of that though, so while we wait we may as well munch on a couple of Jaffa Cakes. They’re tax free after all.

RedEaredRabbit