David Prosser: Another attack on the saviour of the world

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The Independent Online

Outlook Gordon Brown may have saved the world, but rather too many of our neighbours are queuing up to criticise his package of recession-busting policies. Hard on the heels of the undiplomatic critique of Britain's borrowing plans offered by Germany earlier this month comes Olivier Blanchard, the International Monetary Fund economist, who says the 2.5 percentage-point VAT cut that came into force on 1 December was a bad idea.

Mr Blanchard's objection is one that has already been raised: that the VAT cut will cost £11bn in forgone tax over the 13 months to which it will apply, but is too small to persuade people to go shopping.

You can see his point. If the discounts offered by retailers during the run-up to Christmas – 20 per cent and more – have not been enough to tempt people back into the shops, how is a measly 2.5 percentage-point VAT cut going to do the job?

However, critics of the VAT cut make it sound as if this is the only economic stimulus being offered up. It is not. We now have interest rates that are lower than at any time since 1951, for example. There are also spending plans, such as a £3bn splurge on schools and hospitals.

Moreover, there is some evidence that the VAT cut has already helped at the margins. The Nationwide Building Society index of consumer confidence, at an all-time low before the reduction was announced, registered a small rise following its implementation. Hardly the green shoots of recovery, but still welcome.

As The Independent reveals today, Alistair Darling is already preparing to downgrade the economic forecasts he made in last month's pre-Budget report. But one argument he makes for improvements towards the end of next year is that retailers will be able to start imploring customers to spend before the VAT cut comes to an end on 31 December 2009.

Is Mr Blanchard right to argue that the cost of the cut is disproportionate to its benefits? We don't yet know, but one thing to be said in favour of offering a tax cut in this way is its fairness. VAT is one of the few taxes that everyone pays. Let's now see whether the reduction is as effective as it is egalitarian.