The claim
“In the last quarter of 2009, it is now clear that it was government support, including our VAT reduction and then our car scrappage scheme and other measures for employment that kept the British economy moving forward…In the first quarter of 2010 we now know that the economy grew by 0.2 per cent despite all the difficulties of these first three winter months. We estimate that that is around an extra £600m of growth in that quarter, showing the continued importance of government support for the economy.”
Gordon Brown, Labour press conference, 23 April 2010

The background
Gordon Brown was trying to bask in the glory of two quarters of economic growth in the UK – official figures out on Friday morning showed GDP had grown by 0.2 per cent in the first three months of this year. But we’re hardly “racing out of recession”, as David Cameron said that afternoon.

The growth shows we were right with our stimulus package, so this is no time for “a novice” – the Tories would jeopardise the recovery, Mr Brown said. Of course, we’ve heard it before.

But the VAT cut was expensive, costing £12.4bn over the year. And as the recovery struggles on, did Mr Brown’s stimulus really have the impact he would have you believe?

The analysis
The Institute for Fiscal Studies was in favour of the VAT cut before it was brought in, and believes the schemes and others such as the car scrappage scheme have had an impact in boosting the recovery.

They say that the recovery in the last three months of 2009, when GDP grew by 0.4 per cent, will have been boosted by people bringing their spending forward to take advantage of the lower VAT level or the car scrappage scheme (N.B. the scrappage scheme would also have benefited the overseas companies selling cars here, but then again UK manufacturers could have benefited from similar schemes in other countries).

If the economy has benefited from the stimulus then other factors, such as lower unemployment, will be boosted which can in turn put more back into the economy.

But withdrawing the stimulus will have a knock-on effect. Those people who brought forward their bigger purchases, particularly on white goods, to 2009 when VAT was lower will not be likely to make the same purchases in 2010. The scrappage scheme was still going until the end of last month.

This, as Gordon Brown acknowledged, could be one of the reasons that today’s figures look a little shaky. He also blamed the winter weather.

But how big or small the impact of the fiscal stimulus was is difficult to measure. In January, Oxford Economics modelled what would have happened if there had been no stimulus.

In the first nine months of last year, their model suggests, output would have been lower but not significantly so. But since the government is already withdrawing the stimulus, they forecast that by the end of 2010 the economy would be slightly bigger than the non-fiscal-stimulus alternative.

But, they said, changes to interest rates, set by the independent Bank of England, did far more to boost the economy in the first nine months of last year. Plus, of course, it does not take into account factors such as the billions pumped into the economy through quantitative easing – Oxford Economics said there was too much uncertainty to adjust for it in the models.

As an aside, Mr Brown also boosted about the recovery compared to Germany, Italy and Spain. “Germany’s growth is flat, Italy has slipped back into recession, Spain is yet to emerge,” he said.

He did not point out that Germany emerged from recession, along with France, ahead of the UK and has had two quarters of growth at 0.4 per cent and 0.7 per cent before it flattened. And, while their recession was deeper, it lasted for four quarters, rather than our six.

Italy’s growth has slipped into negative territory for the last quarter, but this is not technically a recession again yet as they have only reported one quarter of negative growth since their emergence – you generally need two consecutive quarters to yield negative numbers to be in recession. They may well be in recession when they release their numbers for the first quarter of 2010, but they’re not just now.

Plus with growth at just 0.2 per cent in the first quarter of 2010, talk of a double dip recession in the UK has not abated just yet – even Mr Brown is warning that it is possible under the Conservative policies.

The verdict
So these experts, at least, agree that the fiscal stimulus efforts such as cutting VAT for a year and the car scrappage scheme have had an impact in boosting the economy, but it’s not easy to tell how much, particularly compared to other measures such as lowering interest rates.

And those people who went out and spent at the end of 2009 to avoid the VAT rise, particularly on white goods, will be unlikely to go and buy similar goods in 2010.

So while the recovery is still fragile, Mr Brown should be cautious of making comparisons with his European counterparts just yet.