British retail sales jump after VAT cut

The British Government's controversial decision to offer a temporary cut in value added tax (VAT) to stimulate consumer spending has proved successful, a report from a leading economic think tank says.

The Centre for Economics and Business Research (CEBR) will say official retail sales figures for the three months after the VAT cut - from 17.5 per cent to 15 per cent, at the beginning of December - provide clear evidence that the reduction is working.

"There was an immediate boost to the volume of retail sales after the cut was introduced," said CEBR chief executive Douglas McWilliams.

"Annual growth in retail sales accelerated from 1.6 per cent in November to 2.6 per cent in December. Sales growth then accelerated further in January and registered a marginal decline in February to 2 per cent."

McWilliams said the CEBR's economic models suggested that without the VAT concession, retail sales growth would have fallen to zero by February, a pattern of decline seen in early 1990s recession.

So retailers' turnover was boosted by 2.1 billion ($5.26 billion) during the first three months of the VAT cut, which is due to expire next January.

The VAT reduction was opposed by political rivals of Chancellor Alistair Darling and it has also been heavily criticised by leading retailers.

But CEBR estimates the reduction's total net cost to the public finances will be between 4 billion and 5 billion and the extra retail sales generated will total between 8 billion and 9 billion.

It will urge the Government to announce an extension of the VAT reduction to July 2010.

- INDEPENDENT