Major cuts in government spending and the Vat rate increase to 20% were the only topics on retailers' lips on a recent visit to London. While their emergency budget decisions had an unwelcome reception from some retailers in the UK, Chambers Ireland has welcomed the British government's decision.

Extreme emergency budget cuts and Vat increases are unfortunately all too common in this country, but what does Britain's budget mean for the future of retailing – in the UK, the Republic of Ireland and Northern Ireland? As Chambers Ireland chief executive Ian Talbot points out, many economies are only now facing up to the reality of the global economic crisis of the last few years – Ireland had at least recognised the severity of the situation and back in 2008 put measures in place to dig us out of our mess.

However, business and retail leaders in Northern Ireland have warned that the emergency budget could cost its economy millions of pounds in lost revenue from cross-border shopping and jeopardise jobs.

The Northern Ireland Chamber of Commerce said it is likely to act as a major deterrent to euro shoppers, and will have a negative effect on small enterprise there because the cost of doing business will also increase.

The independent retail trade association in the North said the Vat increases could result in the worst-case scenarios of local economies suffering small business closures, and described the decision as a "regressive move" that will hit everyone in the North.

South of the border however, retailers are jumping for joy at the UK Vat increase. Enterprise minister Batt O'Keeffe said the new higher Vat rate would stimulate the south's economy and encourage retail sales in the Republic, which will curtail the loss of revenue as a result of cross-border shopping, and create jobs. It is estimated that €600m in revenue has been lost from the state's coffers due to consumers going North. O'Keeffe is confident the increase in UK Vat will incentivise consumers to shop locally and not cross the border to do their spending.

Border retailers also seem to be welcoming the increase as it provides an opportunity to rebalance trade between the Republic and Northern Ireland, and provides a chance to regain price parity. The general consensus in the south is that the increased Vat rate north of the border has the potential to bring real relief to many retailers by reducing cost differentials between Ireland and the UK.

And so it seems the first green shoots for retailers in Ireland might just be beginning to appear. According to information released last week by property consultants CBRE, although the first six months of 2010 continued to be difficult for Irish retailers, there are signs that the worst is behind the sector as consumer confidence has rebounded from its all-time lows of a year ago and consumer spending habits have started a tentative recovery.

CBRE also found that footfall counts on Dublin's major shopping streets have remained stable throughout the recession – perhaps a further indication of how cautious Irish shoppers have become. While there is nothing wrong with encouraging the first green shoots, retailers must also remain grounded in the harsh realities that most operators are experiencing significant losses even if close to parity and that the Irish retail market is down over 30% since 2007. With about 270,000 people employed in the Irish retail industry, let's hope the news of the UK's Vat increase will reflect favourably on retail on this side of the border. We are depending on it.

In the UK, while the Vat increase is generally unpopular with retailers, some believe it is a necessary evil to ensure the long-term stability of the country. Asda chief executive Andy Clarke called the budget "brave", while others believe it is harsh and will be imposed at a cruel point in the retail calendar, as Sainsbury's chief executive Justin King pointed out. "The date of the Vat increase is so soon after the Christmas period and right in the middle of the January sales," he said.

Aurora Fashions chairman Derek Lovelock said the Vat rise could lead to a "bumper Christmas", but added that it will be "one hell of a hangover" in the new year. The possibility of job losses and fears for the scale of public spending cuts will certainly hit consumer confidence there even further, he claimed.

In addition, "cost pressures from the exchange rate, commodity price increases, Chinese wage inflation and so on mean that there will be pressures on both sales and margins for the foreseeable future. But as always, it is our job as fashion retailers to respond with great product that the customer can't do without, at a price she is prepared to pay," Lovelock added.

Ian Galvin is head of Aurora Fashions