Leading article: The cut that cures

We report today that the Chancellor, Alistair Darling, is to cut Value Added Tax tomorrow in an attempt to stimulate the economy and to reduce the severity of the coming recession. If cutting tax is the right policy – a question to which we return in a moment – then VAT is the right tax to cut.

It is right for reasons of both economics and social justice. Economically, a cut in sales tax is more likely to encourage people to spend money than a cut in income tax. With an income tax cut, a significant proportion of the money retained by the taxpayer will be saved – especially in times such as these when people are fearful about the future. Normally, higher savings would be desirable, but these are not normal times.

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In the short term, it is important that consumer spending is sustained, in order to maintain levels of economic activity, and a cut in shop prices by, say, more than 2 per cent would send an effective market signal. In addition, a VAT cut is felt immediately – it could take effect this week – whereas a cut in income tax can take more than a month to feed through into take-home pay.

A cut in VAT is also right for reasons of social justice. Pensioners and benefit claimants gain from it, as well as those in work. An income tax cut would restrict the gains to people in jobs, and its effect would be regressive, in that the higher-paid would gain most.

No doubt Mr Darling will announce other tinkerings and complications of the tax system tomorrow, as chancellors are wont to do, although Nigel Lawson did at least try to simplify taxes. In particular, repairing the damage of the abolition of the 10p rate of income tax is unfinished business that will cost a few billion to finish. But if the VAT cut is the main tax cut tomorrow it is the right one.

A more fundamental question, however, is whether any tax cut paid for by higher public borrowing is the right policy. On this question we are nervous, and suspect that the Conservatives may have a point. It has become apparent over the past week that the Treasury is worried about the effect of an unfunded tax cut on global confidence in the British economy. So much so that Mr Darling will have to be explicit tomorrow about the need for taxes to rise in years to come – something about which Gordon Brown has avoided plain speaking so far.

But will a tax cut work, or will it simply make the recession longer and the recovery harder? The truth is that no one knows and it might have been better, as John Rentoul writes today, to wait to see what the early effects might be of the emergency 1.5-point cut in interest rates and – a factor that has not had the attention it deserves – the sharp devaluation of the pound.

It may well be that the Conservatives are constrained by their history on this. John Maples, not previously well-known to the world as a deputy chairman of the party, said in the House of Commons on Monday that "the recession must take its course". Seventy-two hours later, he emerged from a sound-proof interrogation facility behind the Speaker's Chair to offer a grovelling apology for having reminded everyone that it was Norman Lamont, David Cameron's former boss, who said that a recession was a price "well worth paying" to get inflation down.

It is difficult for any politician to make the case made by Hamish McRae, our economics editor, that economies need occasional recessions in order to renew themselves. It was hard enough for Jeremy Vine on BBC radio last week to squeeze from Mr Brown a reluctant and indirect apology for his having promised to abolish boom and bust.

If the Tories are hampered by their past image as the harsh, uncaring party, the Prime Minister has a problem in that his motives are seen as more purely electoral than the Opposition's. Where Mr Cameron and George Osborne are thought to be focused on what on earth they would do if they should find themselves in government in 18 months' time, Mr Brown's actions are assumed to be dictated by the short-term need to claw back enough in the opinion polls to avoid defeat at the election.

That is the political background to tomorrow's statement. Mr Brown's refusal to rule out an election next year ("My undivided attention is on the economy; I am not thinking about anything else"), and the fact that a "temporary" cut in VAT would come to an end soon after an election in 2010, is likely only to increase speculation about a June 2009 poll.

When he stands up at 3.30 tomorrow, Mr Darling has to convince us that his mini-Budget is right for the country in the long run and not simply an election bribe.