Conservatives last night vowed to vote against Alistair Darling's plans for a 2.5 per cent temporary cut in VAT, as ministers faced claims that the centrepiece of the pre-Budget report would not do enough to kick-start Britain's weakening economy.
Senior party figures indicated they would take the highly symbolic step of opposing the one-year tax cut in the division lobbies.
Yesterday, Mr Darling confirmed the widely-trailed move to cut VAT from 17.5 per cent to 15 per cent for 13 months from 1 December at a cost of £12.5bn. MPs and industry figures warned that it would do little to stimulate demand for domestic industry. The cut in VAT, which yields the Treasury more than £80bn a year, was the centrepiece of the pre-Budget report, as the Chancellor moved to cut pre-Christmas bills to boost consumer spending.
Yesterday, retailers pledged to cut prices as soon as the VAT reduction was implemented. John Browett, chief executive of Currys, PC World and Dixons.co.uk, said: "Unlike the banks, we will be passing on the full price reduction immediately. The antidote to the economic downturn is ... about restoring consumer confidence. This announcement is a welcome step ..."
But there were warnings that the VAT cut would offer limited help to British manufacturers and could be outweighed by the cost to retailers of changing prices. Pensioners' groups said the cut would do nothing to help the poorest people's fuel and food bills.
George Osborne, the shadow Chancellor, said: "We will see if it has the great economic effect the Prime Minister expects." He warned that "many retailers were already questioning the cost of implementing it and the impact it will have on the high street."
Vince Cable, the Liberal Democrat Treasury spokesman, told MPs: "What I fail to see is how the economy gets a major stimulus from, for example, a £5 cut in a £220 imported flat-screen television, or a 50p cut in a £25 restaurant bill. Surely it would be more sensible to put money into the pockets of low-paid workers by cutting their income tax?"
Kenneth Clarke, the former Conservative chancellor, who backed the idea of a short-term VAT cut at the weekend, criticised the Government's package as a "reckless gamble" yesterday, insisting that it could cause longer term increases in interest rates.
David Kern, chief economist at the British Chambers of Commerce, warned: "The direct benefits of a VAT cut are uncertain. There could be significant leakages into savings and imports.... a VAT cut... does not provide sufficient encouragement for business to limit unemployment increases and to continue investing."
Frank Haskew, head of the Institute of Chartered Accountants tax faculty, added: "The cost of this may outweigh the benefit of increased spending."