James Moore: A big impact from a small cut's removal

Outlook: Take a financial hit you really can't afford by following suit or give up yet more market share to the giants
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The Independent Online

How much impact has the Chancellor's VAT cut really had? Dismissed at the time it was made as a half-hearted measure that would do next to nothing to stimulate the economy, its removal on 1 January is now being described as a nightmare.

Had he not produced such a gutless Budget, you could almost start to feel just the teeniest bit of sympathy for Alistair Darling, who on this one, clearly can't win. Almost.

But perhaps the critics do actually have a point. When introduced, the VAT cut was barely noticeable. Two and a half per cent really doesn't amount to very much in real terms. A £300 flat screen TV would have been all of £7.50 cheaper (assuming the retailer passed it on fully), and if you're contemplating spending that much, £7.50 one way or the other probably isn't going to make that much difference to your decision.

It's also worth noting that retailers were already discounting aggressively when the cut was introduced, just to get people through the doors. Discounts might have increased a little, but so what? As the British Retail Consortium argued at the time the VAT cut probably helped a bit at the margins , but that is about it.

Now the cut is going, though, it is certainly being noticed. Elementary psychology, my dear Darling. That £7.50 might not amount to much off a £300 purchase but now you have a choice. Either you buy the TV before 1 January and avoid the VAT rise or you wait until after 1 January and pay it. With ads screaming "beat the taxman – sale now on" wherever you care to look, the answer is obvious. You spend now. Hence the impressive footfall numbers being recorded by retailers and excited talk of British shoppers' multi-billion pound post Christmas spending spree.

Of course, in many cases the extra VAT won't actually be re-applied on 1 January. So it's a false choice because the larger retailers will chose to absorb the increase, at least during the early part of the new year.

All the big four grocers (Tesco, Asda, Sainsbury's and Morrisons) have said as much, pledging to "hold off" the tax rise on "many" non-food products (read those that will generate plenty of publicity and, thus, footfall). The other high street heavyweights, will no doubt join them. Leaving the smaller players, the stragglers and the strugglers with a nasty dilemma.

Take a financial hit you really can't afford by following suit or give up yet more market share to the giants at a time when your customers are once again tightening their purse strings as the New Year chill begins, with the jobs market still weak, pay rises, if there are any, small and household budgets under pressure. The VAT cut may indeed have helped at the margins, but its removal could have much a wider impact.

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