Peter Jones: The price isn't right | Alistair Darling wants us to spend, spend, spend, but signs from the high street this weekend indicate his gamble won't pay off

IT LOOKED like just another pre-Christmas Saturday at Edinburgh's St James Centre yesterday – long lines of cars at the car parks and walkways inside crammed with people. Yet it wasn't business as usual. Cheap goods shops such as Poundland were crammed. Across the way, clothes shops such as Quiz, Bank and Internacionale seemed almost empty despite big signs advertising 50% and even 75% off selected lines – notices you expect to see in January, not December

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Yet this was the weekend after Chancellor Alistair Darling announced he was cutting VAT from 17.5% to 15% in a £12.5bn bid to get tills jingling faster and the economy back on its feet. "I don't think it will make any difference," says Pat Laughlin, in town from Morningside with her grandchildren. "We are not planning to buy any more presents; most of our Christmas shopping is already done." Husband John, asked if the VAT cut had make him think about spending more, says: "I think to motivate people, you are going to have to offer them 25% off."

This is the type of shopper that Andrew Murphy, manager of the centre's John Lewis department store, is all too familiar with. All week, his staff have been working flat out to change the price tags on hundreds of thousands of items. On Friday morning, the company's computerised till system implemented the cut – 2.2% on all VAT-rated goods – making the reduction available to shoppers three days before it officially comes into force tomorrow.

Have they been rushing in to spend, spend, spend? "No," says Murphy gloomily. Why not? "Let me tell you about a conversation with a customer who was looking to buy a £1,200 flat screen TV. He said he thought he would wait until Monday when that VAT came down. We said to him: 'Oh, we've got good news because we have already taken the VAT off.' He said: 'No thanks, I'll wait until Monday when the Government takes the VAT off.' There have been nine conversations like that, and that's only in the audio and TV department. Imagine how many others there have been across the whole store."

Murphy thinks that decisions to put off buyers like these have been responsible for a 3%-5% slump in sales this week since Monday's announcement of the VAT cut was made. So is he expecting an equivalent boost in sales, and then perhaps some more when Monday dawns? Again, the answer is 'no'. Murphy says that most of the big high street stores have been offering discounts of between 10%-20% over the last few weeks and John Lewis, through its "never knowingly undersold" policy, has been matching them. "Against that, 2% off isn't going to make a difference," he says.

Such portents suggest that Darling's emergency Budget will not be the economic tonic he hopes. Why did he cut VAT rather than providing an income tax boost as President George Bush did for Americans this year, giving the average US taxpayer a tax rebate of $600 (£390)?

Household debt is now also a big problem in Britain. The average Scottish household is reckoned to owe about £10,000 in credit card and other loans. And that excludes mortgage debt. The credit crunch means that what has become the usual method of paying off the debt, switching to a new and bigger mortgage, is no longer available to most people.

So cutting prices in the shops may well have looked like a better bet. This weekend is the first of the last four shopping weekends before Christmas, traditionally the time when shops pull in a huge chunk of their annual income. A company such as Woolworths, which collapsed into the hands of accountants this week, normally expects to make 80% of its income in December. The threat to 25,000 jobs caused by the demise of Woolworths exposes the menace to the economy and employment which Darling's move is trying to stave off.

Woolies' problem is that the company has £385m of debt. A lot of that debt was needed to buy in the stock it hopes to sell this December. Normally that stock would be supplied on credit terms and the suppliers would get paid in January. But worried by Woolies' big pile of existing debt, and by the prospect that much of the stock would not be sold because of the recession, suppliers demanded cash up front. Woolies' bosses could not find it, so the business went bust.

This problem is being faced by countless retailers. And with 254,000 Scots working in retailing, 11% of the Scottish workforce, the economic threat is all too obvious. Many of these jobs are in small shops. So the package of aid offered by Darling to small businesses – access to a £1bn loan fund, postponement of a tax increase, the ability to defer tax payments until businesses could afford them and the ability to offset losses against profits over the past three years – is highly important and perhaps the best bit of the package.

Also important for the Scottish economy is the prospect of a new tax allowance for offshore oil and gas companies. Having got swollen in the summer as the crude oil price soared up to $147 a barrel, they have watched with alarm as prices have plunged equally fast – sinking down to $45 a barrel before closing on Friday at just over $50 a barrel. The new tax allowance, due to come into force next year, is intended to make the exploitation of new marginal oilfields a bit cheaper, which should help sustain the onshore oil and gas industry in North-east Scotland.

And yet the overall prospects are still bleak. The recession we are now in will still carry on into next year. The total amount of money that Darling is putting back into the economy is about £21.5bn. It sounds a lot, and indeed it is just over 1% of Britain's national income. But because people are more likely to pay down debt or hoard any money they get from these savings, independent forecasters think it will amount to just a 0.3% boost to the economy rather than the 0.5% boost predicted by Darling.

So far, the economic jury is still out on whether Scotland will do better or worse than the rest of the UK – much depends on how the two big banks, the now-state-owned RBS and the soon-to-be-merged HBOS, will fare. But will the British economy as a whole rebound in 2009? Darling thinks that growth will resume next summer. It may do, because an ace card he is keeping quiet about is the decline in the value of the pound which is a big help to exporters. Still, a lot of economists doubt that the uplift will come quite so quickly and even if it does, Britain is going to be left with an almighty debt hangover. Darling is going to treble annual Government borrowing from 2.6% of the wealth annually produced to 8% – a level not seen since the Second World War. The national debt is set to top an unprecedented £1,000bn in 2012-13.

Strange though it may seem in these credit-crunched times when everyone is struggling to borrow, there is plenty of money sloshing about. Stock markets and commodity indices prices have fallen because investors have withdrawn hundreds of billions from them, and Government bonds are a nice safe place to put them.

Darling's problem is that lots of other governments are doing the same so he faces competition when he goes out hawking bonds. The question that potential buyers will ask themselves is whether British bonds are a better bet than, say, German or American bonds. That's why he had to pencil in tax increases and spending cuts to reassure bond-buyers that there will be no problem repaying them their capital.

But the numbers are so huge that it is still a bit of a gamble. And if the shopping portents are anything to go by, the odds on it working are not good.