Judgment will soon be delivered on the flagship of the Government’s financial stimulus package, the temporary 2½ per cent cut in the rate of VAT.
Early indications do not look too promising. Debenhams, Marks and Spencer, Sainsbury and Next will update the market next week on their Christmas trading, with many analysts expecting poor figures, as the impact of the downturn on what is traditionally the busiest retail period is revealed.
The comments of Credit Suisse, reported in today’s Telegraph are particularly stark:
“This is the first time in our recent recollection that there has been such widespread breakdown in market pricing discipline.
“For this reason we will not be surprised if Christmas does not ‘happen’ in a profit sense this year after many years of retailers being saved by last-minute demand for less heavily discounted products.”
The VAT cut therefore looks very likely to have failed. Indeed, David Cameron and, today, the Lib Dems’ Nick Clegg have said as much. So, indeed, have independent commentators, such as Rhys Williams of Arbuthnot Securities:
“It was operationally difficult for retailers to implement, and in terms of a demand driver it had zero impact.”
It is, in truth, hardly surprising that consumers are reluctant to spend, given the general decline in confidence throughout the economy. With businesses unable to access credit, people are fearful of what the future holds.
Before confidence can trickle down to consumers, the logjam preventing the flow of credit to businesses will have to be cleared. At present, however, the omens are not good. A Bank of England survey just published has revealed that, in spite of Government threats and entreaties, lenders further reduced the amount of credit available in the last three months of 2008 and warned that they planned to continue to pare back.
Alistair Darling is rapidly running out of options. The Bank of England is likely to cut base rate next week, but the deep cuts already made have had little or no effect. Suggestions now include injecting yet more cash into the economy – likely to result in a further decline in sterling – or purchasing toxic assets from the banks.
The Conservative proposal of setting up a national loan guarantee scheme has not yet been taken up by the Government. This seems perplexing, given that its cost would be relatively moderate (and it is only in the context of the Government’s stratospheric borrowing plans that £50 billion could possibly be considered moderate), and given also that it has been welcomed by business bodies such as the CBI and the FSB.
The obstacle would seem to be purely political. Gordon Brown has been attempting since last autumn to portray the Conservatives as the “no nothing” party, in contrast to his own globe-bestriding hyperactivity. If he were to adopt the Tory plans, Gordon would tacitly be acknowledging that all his sound and fury over the last three months really did signify nothing.
That would truly be a bitter pill, but, given the continuing downward trajectory of the British economy, Gordon may soon be left with no option but to pinch his nose and swallow it.
On Saturday, Nick Clegg told the 
