Sunday, April 12, 2009

VAT cut has caused "remarkable" boost to sales

The Centre for Economics and Business research says that the VAT cut has boosted sales by £2.1bn. I wonder if their report could be thrust in the faces of Messrs Clegg & Cameron, both of whom stupidly said that the cut was having no benefit.

Update: Here is the full text of the CEBR "Forecasting Eye" release:

Credit where credit’s due – the VAT cut is working

Prior to the Pre‐Budget Report in November, cebr called for a temporary reduction in the rate of Value Added Tax (VAT) of 5 per cent in order to encourage consumer spending and help limit the recession in 2009. Alistair Darling delivered half of what we suggested with a 2.5 per cent cut, citing restrictive EU legislation that precluded a bolder move. The cut of 2.5
per cent was set upon by critics. Opponents argued that it was too small to make a difference, it was overshadowed by the heavy retail discounting underway in any case, or that encouraging saving not consumption was required to rebalance the United Kingdom economy.

Now that we have retail figures from the Office for National Statistics for the first quarter of the cuts duration; it is time to take a view on whether the cut has helped the beleaguered retail sector so far. The figures are clear; the VAT cut is working. There was an immediate boost to the volume of retail sales after the cut was introduced on 1st December 2008. As
shown in the chart overleaf (below), annual growth in retail sales accelerated from 1.6 per cent in November 2008 to 2.6 per cent in December*. Sales growth accelerated further in January to 3.2 per cent, and registered a marginal decline in February to 3.0 per cent.

In our retail sector forecasts prior to November’s VAT cut, we expected to see retail sales continue to decline as the recession intensified, with growth reaching 0 per cent by February 2009. This is in‐line with the fall seen at the beginning of the 1990 recession. Assuming that reality would have followed our forecast in the absence of the policy measure, the VAT
cut has boosted retailers’ turnover by £2.1 billion over the first three months of its operation.

The current plan is to reverse the cut in January 2010 – this 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 rise in retail growth is even more remarkable given the economic context over this period. Following the intensification of the credit crunch in October and the bank bail‐out package the United Kingdom economy was in freefall. Indicators of business and consumer confidence declined markedly, interbank lending spreads rose to new record levels and lending
volumes fell to a trickle. We now know that the UK economy recorded its worst quarter since 1980, with a contraction of 1.6 per cent. Despite all of this, retail sales not only continued to grow, but growth accelerated.

The VAT cut boosts retail spend by £2.1 billion in first three months of operation – the Chancellor should extend it to July 2010
*Retail figures are expressed as the year-on-year change in the three month moving average of sales volume. This measure is considered the most representative by the Office for National Statistics due to the volatility of the retail sales index series

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