VAT cut has 'boosted' spending

Last December’s reduction in VAT from 17.5 per cent to 15 per cent has had a measurable effect on consumer spending, a think tank has claimed.

According to the Centre for Economics and Business Research (CEBR), the cut has produced additional sales worth £2.1 billion.

So successful has the tax reduction been that the CEBR is pushing for it to be extended for a further six months beyond the 31 December date when it is due to revert to the old rate.

The CEBR said: “The figures are clear; the VAT cut is working. There was an immediate boost to the volume of retail sales after the cut was introduced.

“Annual growth in retail sales accelerated from 1.6 per cent in November 2008 to 2.6 per cent in December. Sales growth accelerated further in January to 3.2 per cent, and registered a marginal decline in February to 3 per cent.”

In actual terms, the acceleration in sales has been equivalent to a turnover of £2.1 billion.

The CEBR added: “The rise in retail growth is even more remarkable given the economic context over this period.”

It is estimated that, over the remainder of 2009, sales are likely to improve by up to £9 billion compared with figures had the VAT reduction not been introduced.

However, the CEBR warned that the increase in VAT due to come into effect as from next January could dampen the recovery in consumer activity. For that reason, the think tank urged the Chancellor to extend the lower rate VAT charge until July 2010.

Criticisms that sales growth has been propelled by aggressive price cutting rather than by the reduction in VAT were discounted by the CEBR, which argued that the annual rise in the value of sales, taking note of price changes, has remained steady since the lower rate of VAT was introduced.

Those opposed to the VAT cut have attacked the move either for being too insignificant to make any real difference to consumer spending habits or for choking off vital government income at a time when public debt is soaring.

The Federation of Small Businesses conducted a survey earlier this year which suggested that 97 per cent of firms believed that the VAT measure had produced no discernible impact on spending levels.