VAT increase will not derail retail’s recovery

Simon Wolfson must have been giving his friends in the coalition Government lessons in managing expectations. Despite having said all through the election campaign that they had “no plans to raise VAT”, it was no surprise to any retailer when the rate went up to 20% in this week’s emergency Budget.

Indeed over a dinner hosted by Retail Week on Tuesday evening, a group of the UK’s best-known retail chief executives responded to the increase with a collective shrug of the shoulders. They saw the rise coming and have prepared accordingly.

Let’s not kid ourselves that an increase in VAT is anything other than bad news for retailers, especially at a time when non-food retailers are also being hit by the weakness of the pound against the dollar and rising costs of product (p20). But the reality is that with the public finances in such a weak state, everyone in retail knows that balancing the books and getting the economy back on track is going to be vital for the long-term health of the sector, and that means some tough medicine was inevitable.

What eased the pain of the plans is that the Chancellor George Osborne appears to have listened to retailers when formulating his plans and not neglected the need to stimulate the economy while also making significant savings. Delaying the timing of the VAT increase until January 4 gives retailers time to plan for the increase, and hopefully have a bumper pre-Christmas period by encouraging customers to beat the rise.

While it may annoy non-food specialists, it was right that VAT wasn’t extended to other categories, particularly food. Food isn’t a discretionary purchase so whacking an additional tax on it would hit the poor disproportionately hard and in turn affect the disposable income they have to spend with non-food retailers too. The fact that the most extreme predictions on Capital Gains Tax didn’t come to pass was good news for top-end retail, and it was also encouraging that Osborne recognised the impact wildly fluctuating fuel prices have on consumers’ spending.

It is early days but this was a progressive budget that showed the coalition is thinking not just about savings but about stimulating the economy too. The months ahead aren’t going to be easy and job cuts in the public sector will inevitably hit consumer spending power, especially in the regions. What will be key to retail’s recovery is Osborne’s stewardship of the economy and his ability to sort out the current black hole in the finances. This week he got off to a good start.