The Treasury refused to comment on rumours swirling around Westminster yesterday that a big (temporary) cut in VAT would be the centrepiece of Monday’s pre-Budget report. 

The Sunday Times is tomorrow writing that there will indeed be a 2.5 per cent cut from 17.5 per cent to 15 per cent: the EU lower limit.

Such a move should appeal to the Labour heartland, given that VAT is a regressive tax which hits the poor harder than the rich. It also has the benefit that it can be implemented straight away.  

It would not be cheap, however: as much as £12.5bn, according to reports. It may have to be lifted to 20 per cent in a few year’s time (that is one theory anyhow). And would the move be enough to stimulate the economy?

Many household products - food, newspapers, children’s clothing - are already exempt. Fuel is paid at much lower rate.

As for products on which VAT does apply: would people be more likely to buy a fridge/hi-fi/wardrobe if it costs £115 instead of £117.50? We will soon find out.

If retail sales start to climb in the coming weeks the government will probably claim credit. Yet any spike in turnover could be down to high street sales put in place as emergency measures by shopkeepers.

Today’s FT points out that there were deep discounts (typically 20 per cent) taking place this week at M&S, Debenhams, Dorothy Perkins, Wallace, BHS, George at Asda and House of Fraser - amid fears of imminent corporate collapses elsewhere in the sector.

Tory MP John Maples may have appeared a buffoon for saying last week that “the recession must take its course” - it’s not exactly a vote-winning line of argument for a politician - but does anyone still think we can avoid a painful recession?

November 23, 2008 12:03am in Alistair Darling, Budget, Gordon Brown | Comment