Page last updated at 13:29 GMT, Sunday, 12 April 2009 14:29 UK

Cut in VAT 'boosts retail sales'

Small businesses say the VAT cut has had no impact on their trade

The government's much-criticised cut in VAT is working and has led to a big boost in consumer spending, according to a leading economics consultancy.

The Centre for Economics and Business Research (CEBR) says that the cut, which took effect on 1 December 2008, has led to £2.1bn of extra sales.

The centre says the growth in retail spending is "remarkable".

It argues that the temporary cut of 2.5%, which expires in January 2010, should be extended for six months.

'Immediate boost'

"The figures are clear; the VAT cut is working," the CEBR said.

"There was an immediate boost to the volume of retail sales after the cut was introduced.

The chancellor should extend the duration of the cut to July 2010 when the economy will be stronger
The Centre for Economics and Business Research

"Annual growth in retail sales accelerated from 1.6% in November 2008 to 2.6% in December. Sales growth accelerated further in January to 3.2%, and registered a marginal decline in February to 3%," it added.

This equates to a boost in retailers' turnover of £2.1bn, the centre calculated.

"The rise in retail growth is even more remarkable given the economic context over this period," it argued.

The CEBR estimates that retail sales for the year are likely to be £8-9bn higher that they would have been without the cut.

It believes that raising VAT again in January 2010, as planned, "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."

The boost in sales has not been due to discounts, the centre said. Annual growth in the value of sales, which also measures price changes, has remained steady since the cut was introduced, it argued.

'No impact'

The government's policy of cutting VAT has been widely criticised both at home and abroad.

Some opponents have argued that the cut is too small to make any difference to consumers' spending habits during the recession.

Others have argued that the lost revenue to the state is too great a price to pay at a time when government debt is spiralling.

A poll conducted by the Federation of Small Businesses in February this year found that 97% of firms polled said the VAT cut had had "no impact at all."

The government introduced the 2.5% cut in VAT as part of a package of measures to boost economic activity during the economic downturn.

The CEBR had been a vocal proponent of a cut in VAT to boost consumer spending, calling on the chancellor to cut VAT by 5% towards the end of last year.

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