David Prosser: Give retailers what they really want for Christmas: a lower rate of VAT

  • @davidprosserind

With just four days to go until George Osborne presents his Autumn Statement, the economic outlook isn't getting any better. Yesterday's CBI manufacturing data was bad, while the news from the high street was even worse.

The challenge for the Chancellor now is to recognise there are actions he can take to address some of these problems – even if some of them would require him to swallow a certain amount of political pride.

It is clear next week's statement will include some measures designed to help those ailing manufacturers, for example. They will be welcome, though the biggest headache for industry, suggested the CBI yesterday, is the slowdown in orders from the crisis-hit eurozone, a difficulty that Mr Osborne is powerless to confront.

A big boost for retailers, by contrast, is within the Chancellor's gift. And Sir Philip Green's downbeat assessment of trading suggests that an early Christmas present is very badly needed.

An immediate reduction in VAT – even for a limited period – would be the ideal stocking filler. There are many pressures bearing down on retailers' customers, but the 2.5 percentage points extra VAT they have been paying since the start of the year on everything they buy, bar food, could hardly have come at a worse moment. Mr Osborne would no doubt regard a U-turn as humiliating, but it would be perfectly reasonable for him to say that the economic context today is quite different to the one in which he increased VAT.

The Treasury's defence so far of its insistence on sticking with the policy has been that not doing so would be too costly. It would be interesting to see the detail of the revenue projections, for the figures quoted by ministers appear to suggest they think cutting VAT would not stimulate spending at all.

That's not what we hear from theGovernment when it talks about its aspiration to do away with the 50 per cent top rate of income tax. There, Mr Osborne appears to accept the argument that the higher rate may produce less income tax revenue rather than more, such is the disincentive for high earners (and, one suspects, their ease in avoiding it). If lower income tax rates may boost the tax take, why would lowering VAT not have a similarly beneficial effect?

It would. We know this because the last government cut VAT for 13 months in the middle of the recession in 2009. The result, according to the Centre for Economics and Business Research, was £9bn of extra consumer spending, enough to be the difference between failure and survival for some retailers.

Moreover, while that extra spending did not, in its own right, produce sufficient extra VAT to cover the cost of the lower rate, the additional indirect revenues – lower social security bills for unemployed retail staff, for example, business rates from retailers that would not have been able to pay them otherwise, and so on – were also substantial.