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Finance Bill

The amendment asks us to consider having""a report containing an assessment of the impact of the temporary VAT rate reduction on"" a number of areas. I want to concentrate on the impacts on "UK economic growth" and""the competitiveness of small and medium-sized businesses"." It is crucial to strike the right balance between what is of value to the economy as a whole and what is of value to the competitiveness of individual businesses. On the latter, a fundamental issue is the cost of administering what will, by the end of this period, be two changes in VAT. Business has consistently seen the VAT cut as having no positive impact on their sales. The Federation of Small Businesses conducted a survey of 5,000 of its members, and 97 per cent. said it had had no impact at all in terms of boosting trade. There has been a big cost impact, however. I see that in my own constituency, where a number of small retailers are very unhappy. They are part of the fragile and vulnerable small business situation that we described earlier today. As a result, there are large numbers of empty properties in many towns—although there are perhaps some signs of shops being attracted back. There is a cost involved in decreasing VAT and then increasing it again in terms not only of cash, but time. For those who run small businesses—especially those who have to adjust to these changes in VAT—that is perhaps the most precious commodity of all. The question of where to put in the effort and to use the expertise is crucial, but it is very difficult to cost. That is particularly difficult for a small business that sells tens of thousands of products, and perhaps has only one or two people running it. The impact assessment for the Finance Bill listed a number of actions that business would have to take to implement the temporary VAT cut, including familiarisation; re-pricing; carrying out the extra bookkeeping checks involved; dealing with potential extra accountancy costs; and, of course, making systems changes and upgrades. It estimated that the total compliance costs for business would be about £300 million. I was particularly worried by the paragraphs that followed, in which it was acknowledged that in deciding how to respond to those changes, businesses were likely to have to take lot of other costs into account. Such costs would arise from consulting advisers or, potentially, from renegotiating the terms of any contracts that are inclusive of VAT. Although the assessment recognised that those costs were likely, they were somehow dismissed as being commercial decisions—as if the other changes it had costed were not commercial decisions. Even the impact assessment recognises that costs that have not been properly analysed are involved, and that they are not part of the costings in the assessment. Thus, it is very difficult to make a judgment on this matter, and that has not been a particularly helpful part of the Government's assessment of that part of the activity. On the costs on the ground, as I have mentioned, the FSB survey has shown that there is no sign of the VAT cut working, but it is worth examining whether it is working at the bigger picture level and whether the model behind it was applicable. Without an understanding of that, the assessment required by the amendment would be difficult to achieve. One of the worrying features about the underlying model was that it was a simple supply and demand model of consumption, which would perhaps have been suitable to use in an economy that was doing well, but in one that contained a large marginal element, it ignored the complexities involved. The policy and the modelling that must have taken place in order to introduce this adjustment—the VAT cut and then the raise forward—assuming that any modelling was undertaken, was flawed from the beginning. The Financial Secretary and I have already crossed swords in the debate over whether or not the VAT cut has worked. At that time, he repeated the view of a report by the Centre for Business and Economic Research:""'The figures are clear; the VAT cut is working. There was an immediate boost to the volume of retail sales after the cut was introduced on 1 December.'"" He went on to endorse the report's view that the cut was""'good value for the taxpayer'".—[Official Report, 27 April 2009; Vol. 491, c. 668.]" That is clutching at straws. The view has been based on the volume of retail sales, and there are problems with that approach. The Government cannot have it both ways. If they are going to put a lot of emphasis and reliance on that report, logically they must accept the criticism it makes of raising VAT again in January 2010. It states that that""threatens to cause a consumer downturn and choke the fragile economic recovery"." If they are going to rely on the report for one thing, they must rely on it for the other—although that is not a favourable situation. I have great difficulty in trying to assess whether the VAT cut has worked. It is one of those questions that are illogical in terms of their resolution, because we can make no direct comparison with the counter-argument as to what would have happened without the cut. The need for that was recognised in the evidence given by the Governor of the Bank of England to the Treasury Committee, in which he acknowledged that the real problem was that""It is very hard to know what the counter-factual is."" We do not know how quickly spending would have changed if the VAT cut had not been made. That is the fundamental flaw in claims that the VAT cut has worked, as the Governor pointed out. In the absence of a direct comparator, we need some form of proxy to represent it. A simple increase in sales is not enough. Traditionally, we have looked at whether sales of VAT-able goods have increased more than sales of non-VAT-able. The key proxies are generally non-food sales with VAT versus food sales without VAT. The difference should be surprisingly large if we are to claim any proof that the VAT cut has worked. Because those measures are proxies and the model is simple, it is not possible to distinguish on the basis of volumes, or even values, other factors that have already been mentioned, such as discounts, or to take account of postponed purchases or lower interest rates that may also affect the outcome. So there is no proof there that the VAT cut has worked.