Retailers are slashing prices by up to 75 per cent this weekend in a desperate attempt to claw back hundreds of millions of pounds in sales lost to the combined effects of severe weather and consumer jitters.
Big-name stores launched heavy discounts online yesterday, pinning their hopes on a 10-day frenzy of shopping before George Osborne's planned rise in VAT from 17.5 to 20 per cent takes effect on 4 January.
If the push fails, up to 1,000 firms – particularly in retail and leisure in Scotland and the north-east of England – could go bust in the New Year.
The signs did not look good last night, as new data suggested shopper numbers for December were more than 5 per cent down on last year. A poll for The Independent on Sunday shows deepening gloom among the public, many fearing they will be worse off as a result of the coalition's cuts. Only 30 per cent believe the cuts are fair, while 55 per cent (up from 51 per cent last month) fear the scale of the cuts is too severe and too fast.
Rowan Williams, the Archbishop of Canterbury, spoke in his Christmas Day sermon of the "lasting sense that the most prosperous have yet to shoulder their load". He warned of the "hardship that clearly lies ahead for so many in the wake of the financial crisis and public spending cuts".
The proportion of people who believe the cuts will be felt by the poor more than the wealthy has risen in the past month, to 58 per cent, according to the ComRes/ IoS survey. Only a quarter now believe the coalition government ensures the most vulnerable sections of society are protected.
Alan Johnson, the Shadow Chancellor, said the VAT rise will "undoubtedly have a negative impact on the retail sector". But Treasury minister Lord Sassoon defended the increase as "a necessary measure which will raise £13bn annually in extra revenue which does not have to be found from extra spending cuts or other tax rises".
Industry experts said firms were banking on a bumper start to the festive sales. Optimistic retailers pinned their hopes on the internet, as an estimated 4.8 million people spent £153m shopping online on Christmas Day, online analyst IMRG said. Shoppers are expected to spend £5.2bn in the January sales, according to an ICM poll for Sainsbury's. The snow and ice are estimated, by the Centre for Economics and Business Research, to have cost the UK economy £1bn a day. One retail adviser said: "The smaller chains and independents are the ones that will suffer from the bad weather."
Stephen Robertson, director general of the British Retail Consortium, said that the high street will need "at least 5 per cent" sales growth ahead of 4 January to be able to tough out 2011. This growth would keep sales ahead of inflation and ensure that there is enough money in the bank for retailers to keep trading. The high street, however, would struggle to reach last December's £35.2bn sales, which were already down on 2008. Retail employs 11 per cent of the UK workforce and is one of the sectors expected to hire many of the public sector workers who are made redundant.
The Office for Budget Responsibility estimates that the VAT rise will reduce gross domestic product (GDP) by 0.3 per cent next year, worth £5bn. Harold Tillman, upmarket retailer and chairman of the British Fashion Council, is leading calls for the increase to be delayed by 30 days.
The average household will be £520 worse off as a result of the increase, according to a study from the price comparison website Kelkoo and the Centre for Retail Research. The report also predicted consumer spending will drop by 0.5 per cent or £354m in the first quarter of next year, compared with the same time last year.
John Lewis launched its online sale at 5pm on Christmas Eve, while Argos and Selfridges slashed prices as most people were putting the turkey into the oven yesterday morning. Although online sales are expected to increase 20 per cent over last December, they still account for only 7 per cent of the total shopping market. As a result, improved internet sales cannot arrest the overall decline.
Comet expected 7pm-8pm last night to be the peak for Christmas Day online shoppers, while today up to 700,000 visitors are expected, with 11am to midday the busiest hour. Ikea and Debenhams are stretching Sunday trading laws today by opening at 9am, but not taking money until 10am, in what is known as "browsing time".
Neville Kahn, the Deloitte partner who was the Woolworths administrator, warned: "This year more than ever retailers need a good Christmas because of the tough trading conditions. There will be winners and losers, and we expect medium-sized businesses of around 50 to 150 stores to take most of the strain, as they are neither niche nor big players."
A coalition source denied that the VAT increase threatened to undermine the UK's economy: "The biggest threat to the economy is to do nothing about the record budget deficit which Labour left behind."
Happy new year? Hopes and fears for the economy
"A fragile recovery appears to be under way. Public sector cuts are starting to hit but we remain hopeful that the private sector will be able to sustain growth."
Neil Shah, Director of research, Edison Investment Research
"Early indications are that online retailers have had a strong December in terms of sales. As the VAT increase approaches, we would expect to see a last-minute surge of activity."
David Smith, Managing director, Interactive Media in Retail Group
"The increase in the standard rate of VAT is a necessary measure. It will raise £13bn annually in revenue money, which does not have to be found from extra spending cuts or other tax rises."
Lord Sassoon, Treasury minister
"Raising VAT will hit consumer confidence, damaging the economy. It will also cause job losses, as sellers cut their overheads and producers reduce production."
Tom Clougherty, Executive director, Adam Smith Institute
"George Osborne said he wouldn't raise VAT. David Cameron said it would hit the poorest hardest. This is another broken promise [that] will put the fragile recovery at risk."
Alan Johnson, Shadow Chancellor
"Over the last 10 days of bad weather, VAT collections must be down. [Delaying the VAT rise] would allow people who were going to shop, and want to shop, to do so in January."
Harold Tillman, Chairman, British Fashion Council