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The Government’s much-criticised temporary cut to the standard rate of VAT should be extended by several months because it has so far been successful.
That is the message from the Centre for Economics and Business Research (CEBR), an independent think-tank that has analysed retail data from the Office for National Statistics (ONS) for the first quarter in which the 2.5% reduction was in effect.
'It is time to take a view on whether the cut has helped the beleaguered retail sector so far,’ said the CEBR. ‘The figures are clear: the VAT cut is working.’
In forecasts prior to the rate reduction, the CEBR predicted that retail sales would continue to decline as the recession intensified, with annual growth reaching 0% by February 2009.
But the organisation has shown that sales growth in fact rose from 1.6% in November 2008 to 2.6% the following month, when the VAT cut was made. Growth accelerated further in January 2009 to 3.2%, and registered a marginal decline in February to 3%.
The standard rate of VAT will be reinstated in January next year – but this, claimed the CEBR, ‘threatens to cause a consumer downturn and choke the fragile economic recovery’.
To avoid a potential set-back, the Chancellor should extend the duration of the 15% rate to July 2010 – by which time the think-tank expects the economy to be in a more robust state.
‘We consider that the temporary value added tax cut was the best stimulus option available to the Government, and [it] has helped lessen the impact of the recession,’ said the CEBR, claiming the ONS numbers prove that acceleration in retail sales volume ‘was not achieved through fire sales and fierce discounting on the high street’.
In November’s Pre-Budget Report, the Treasury estimated that the VAT cut would reduce tax revenues by £12.5 billion. The CEBR, however, said that the annual net cost to public finances is more likely to be between £4 billion and £5 billion, with retail sales for the year likely to be around £9 billion higher than would have been the case without the rate reduction.
‘The VAT cut therefore appears to be good value for the taxpayer,’ added the think-tank.
