I was always a fan of the VAT cut – compared to most liberals, anyway. Even before I read the IFS Green Budget (which largely praised it), I thought the complaints from the likes of Sir John Major - that it was as bad as ‘burning money’ - were melodramatic, overwrought and plain wrong.  Everyone had a favourite other use for the money, even people resolutely in favour of giving cash back to the poor. But the logic of saying that a VAT cut is wasted and that spending on favourite ideas is better would also point to raising VAT to spend on those same goodies.  Which would clearly be bonkers in the current climate.

The VAT cut puts money back in ordinary pockets, and lets people decide where to put it. £3 a week for a poor family means a lot more than the vague promise of future grand projects.  By definition, the stimulus goes into the economic activity we need – spending – rather than risking being saved, as a tax rebate might. And distortions to the economy are kept to a minimum, because it allows consumers to determine where the money goes.

So I am glad to see that the CEBR has found in favour of the cut as well:

“The CEBR argues that the cut in retail sales is likely to add a total of £8bn-£9bn to retailers’ sales in the 13 months to January 2010, when the Treasury plans to reverse the cut. The net cost to the taxpayer is likely to be £4bn-£5bn once higher tax receipts and lower social expenditure costs are factored in, says the CEBR, rather than the £12.5bn in government forecasts.”

The CEBR’s piece is here. If they are right, and a fiscal cost of £5bn has achieved increased sales of £9bn, then it is a triumph, compared to much of what this government has done. David Smith has long held this position as well - I am hoping he will now comment on the CEBR paper. 

The peerless Chris Dillow explains the importance of the income effect behind its actual operation in a discussion that mocks Sarkozy's economically illiterate attack on the move.  To paraphrase: even if people do not leap up at the sight of prices falling 2% and go out madly shopping, the VAT cut still makes them richer- if it did not, it could not make the government poorer – and they will spend most of that money.   Simon Wolfson’s criticism that it increases the risk of deflation is particularly incoherent.  What matters for deflation is the general expectation of lower prices.  A temporary VAT cut hard-wires a future price rise in.

So here is one policy area where I think the government got it right, for once.