VAT cut 'helped to boost struggling retail sales'

The Government's controversial decision to offer a temporary cut in VAT in order to stimulate consumer spending has proved successful, a report from a leading economic think tank says.

The Centre for Economics and Business Research (CEBR) will today say that official retail sales figures for the three months following the introduction of the VAT cut – which lowered the rate from 17.5 per cent to 15 per cent at the beginning of December – provide clear evidence that the reduction is working.

"There was an immediate boost to the volume of retail sales after the cut was introduced on 1 December 2009," said Douglas McWilliams, the chief executive of the CEBR.

"Annual growth in retail sales accelerated from 1.6 per cent in November to 2.6 per cent in December – sales growth then accelerated further in January and registered a marginal decline in February to 2 per cent."

Mr McWilliams said the CEBR's economic models suggest that without the VAT concession, retail sales growth would have fallen to zero by February, a pattern of decline that was seen in the previous recession in the UK in the early Nineties. Retailers' turnover was therefore boosted by £2.1bn during the first three months of the VAT cut, which is due to expire next January.

The VAT reduction was opposed by Mr Darling's political rivals and it has also been heavily criticised by leading retailers. Simon Wolfson, the chief executive of Next, has repeatedly complained that the lower rate of VAT has been of no help to his business. However, the CEBR said the VAT reduction had enabled retail sales to continue growing during the worst period for the UK economy as a whole since 1980.

It estimates the total net cost to the public finances of the reduction will be £4bn-£5bn and that the additional retail sales generated will total between £8bn and £9bn.

"In summary, we consider that the temporary VAT cut was the best stimulus option available to the government and has helped lessen the impact of the recession," Mr McWilliams added.

Mr Darling is currently making the final preparations for this year's Budget, which he is due to announce in 10 days' time.

The Chancellor is under pressure to resist further fiscal giveaways from those worried about borrowing – including the Governor of the Bank of England – but the CEBR will today urge the government to announce an extension of the VAT reduction.

"The current plan is to reverse the cut in January 2010. This threatens to cause a consumer downturn and choke the fragile economic recovery – the Chancellor should extend the duration of the cut to July 2010 when the economy will be stronger," Mr McWilliams said.