by Chris Dillow

Does Nicolas Sarkozy have a clue? He says the VAT cut had “absolutely not worked”:

Britain is cutting taxes. That will bring them nothing. Consumption continues to decrease.

However, official figures (pdf) flatly contradict this. They show that the volume of sales actually rose by 1.6 per cent in December, to stand 3.9 per cent higher than last December. Of course, there are all sorts of ways to quibble with this data – ordinary noise is magnified by uncertainties about seasonal adjustment processes and the fact that the statisticians’ definition of “December” actually stretched to January 3.



And yes, the CBI and BRC data do show that sales are falling. But these are smaller samples of retailers than official data, and refer only to the value of sales, which would fall as prices fall.

What’s more, one retailer in particular seems to be thriving. John Lewis – one of the few major retailers not run by baboons – says its January trading was “hugely fruitful.”

Far from showing that the VAT cut hasn’t worked, the data has for me had the opposite effect. My immediate reaction was that the cut wouldn’t work, as consumer spending is not terribly price-elastic. But the data has caused me to have a little (only little) doubt about this.

But even if the cut hasn’t worked yet – and we’ll never know the counterfactual – it does not follow that it will bring us nothing. The move has an income effect. If shoppers don’t spend more in response to lower prices, they’ll have more cash left over. Which they could spend. They needn’t have done this already. It’s possible, therefore, that even if the VAT cut hasn’t worked yet, it might eventually do so.

Sarkozy’s dogmatism is, therefore, inconsistent with both data and theory. But I suppose his mind is on other things.