We now know, pretty much, that the shiniest bauble in the Chancellor’s sack of Recession Budget surprises is to be a historic, if temporary, cut in the main rate of VAT – probably from 17.5 per cent to 15 per cent. Until now, VAT has only ever gone up.

In making this £12.5 billion-plus gift to consumers, Alistair Darling’s hope is to entice them into a spending spree before Christmas, and still more spending in the months that follow.

Will the package he offers be enough to limit the pain? In any “normal” downturn, tax changes are less effective than interest-rate cuts. This recession, though, is being fuelled by a credit crunch that saps the benefit of rate cuts, and reinforces the case for turning to the weapons of fiscal policy – tax and spending changes.

Many experts believe that a cut in indirect taxes such as VAT will usually deliver a bigger boost than an equivalent cut in income tax. This is because much of the cash gained from any direct tax cut will often be saved rather than spent. In contrast, consumers will see a cut in VAT as being similar to discounts in the sales, especially on “big-ticket” items where lower VAT makes a big difference.

So there is a plausible rationale underpinning Mr Darling’s choice of giveaway. A key pitfall, however, is that it depends on consumers still having some cash to spend. Many are unable to borrow as they normally would, and this tilts the balance back towards direct tax cuts.

Combining a VAT reduction with direct tax cuts ought to make the medicine more effective. But with consumers knowing that a bigger tax bill to pay for all this largesse is “in the post”, many may still be reluctant to spend.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive