Presenting the pre-Budget report in the House of Commons this afternoon, Darling said that he will cut VAT from 17.5 per cent to 15 per cent, with effect from December 1.
VAT will continue at this rate for 13 months before returning to the previous level in 2010. Darling said that by that point, the recovery will have begun.
Reducing VAT by 2.5 per cent will cost£12.5 billion a year. Alcohol, tobacco and petrol taxes will be raised to offset the VAT cut.
He urged retailers to pass on the cut “as soon as they can” to stimulate growth.
The British Retail Consortium has welcomed the news and said its members will pass on the cut. It added, however, that it was concerned that the change is only temporary.
British Retail Consortium director general Stephen Robertson said of the pre-Budget report: “With inflation under control, the Chancellor is right to seek to help customers and put the economy back on course to stability. I hope this complex package of measures is economically rather than politically driven.”
He added that the VAT reduction was “a modest but welcome boost for hard-pressed households”.
“It must be just one of a range of reviving measures including cuts in income tax and interest rates,” he said. “Getting the economy up and running is vital and, in this fiercely competitive climate, our members will certainly be passing this on.”
He added that the change has fallen at the busiest time of the year for retailers to implement, but they will “cope”.
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