Gordon Brown may be in full mobile-hurling mode this morning after his VAT cuts were criticised by the French president in a marathon TV interview on Thursday night.
The strategy had “absolutely not worked,” Nicolas Sarkozy said. “If anything, consumption has gone down.” He went on to say that a slight cut in VAT wouldn’t encourage people to buy more if “they are scared of their future”.
The president said that targeted investments were a better approach than consumer spending measures: “Britain is cutting taxes. That will bring them nothing. Consumption continues to decrease in Britain.”
The Elysee Palace has assured London that his comments were – ahem – not intended as an attack on British economic policy.
But a no 10 spokesman said today: “The Elysee have been in contact this morning to assure us that these remarks were not meant as a critique of UK economic policy – which is nice.”
The temporary 2.5% cut in VAT has long been seen with suspicion. Not only is it unclear whether it will spur greater spending but there are fears that VAT (which was cut from 17.5 per cent to 15 per cent) could go up to 20 per cent in a year’s time to compensate for the lost revenue.
Earlier this week, Dutch finance minister Wouter Bos told the FT that the VAT cut was “not a very wise thing to do”, adding: “I don’t believe it will contribute to a recovery of the economy, whereas it does put pressure on other countries to do the same.”
Peer Steinbruck, German finance minister, weighed in before Christmas by accusing Britain of “crass Keynesianism” – before going on to announce a fiscal stimulus package of his own.
The Number 10 spokesman said: “The point about VAT, as we have said all along, is that (the cut) will run for a year so it is too early to judge the effect it has had…We have set out quite clearly the case for the VAT cut and all along we have said that other countries must take what measures are appropriate for their own economic circumstances, but the important thing is that we coordinate our response.”
The Institute for Fiscal Studies has called it a “reasonably effective stimulus” which prevented sales from falling as far as they would otherwise have done.
Jim Pickard
Kiran Stacey
