David Prosser: A cut in VAT is the only way to avoid more blood on the high street

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The Independent Online

Outlook Crisis averted? It would be lovely to think the official data published yesterday revealing a June bounce-back in retail sales might suggest the worst is over for the beleaguered high street. Sadly, that would be completely the wrong conclusion to jump to.

For one thing, the 0.8 per cent rise in retail sales seen in June follows a 1.5 per cent decline in May, so we're still sharply down on a two-month view. For another, there is evidence that retailers persuaded shoppers to part with their cash only through some heavy discounting – by bringing forward the summer sales, in fact. That doesn't suggest the improvement can be sustained.

The immovable obstacle for the retail sector is the outlook for consumer spending, which remains utterly bleak. Household income fell during both the first and second quarters of the year, and there is no reason to expect a recovery. Wage settlements are still running at well below the rate of inflation, unemployment isrising and many families are still trying to pay down debt.

Nor can the elevated levels of inflation that households face be easily avoided, for the biggest contributions to price increases are being made by non-discretionary spending items. Look at the price rise announced yesterday by Scottish & Southern Energy, for example, or at the continued increases in the cost of basic foodstuffs. Even the housing market is pointing the wrong way for retailers. Not only do flat or falling prices leave consumers feel less wealthy, they also mean fewer people moving home. That means less demand for everything from carpets to fridges.

Adam Posen, the Monetary Policy Committee member who favours a return to quantitative easing (QE), said yesterday that he expected inflation to peak in the months ahead. One can only hope he is right, for many retailers are running out of time for the squeeze on household incomes to ease.

In the meantime, at the risk of sounding like a stuck record, for I have made this point before, it really is a mistake for the Chancellor not to at least consider heeding the calls for a temporary cut in the rate of value added tax.

George Osborne's decision to raise VAT from 17.5 per cent to 20 per cent at the beginning of the year was understandable in the context of the public finances – yesterday's data on these would have been much worse without the increase – but in hindsight, we can see it was made at exactly the wrong moment.

Mr Posen's call for a return to QE is a proposal for a monetary policy stimulus to the economy. The case for an equivalent fiscal response to the slowdown in the recovery is just as clear – andgiven that this slowdown is being felt most keenly in the consumer-facing sectors of the economy, a VAT cut is the right way to deliver that response.