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April 2009 (Wiley Blackwell)
Article
Assessing the temporary VAT cut policy in the UK
Type: Journal Articles
Volume, issue, pages: Vol. 30, No. 1, pp. 31-38
JEL classification: H2, H3, E21
Keywords: Fiscal stimulus, fiscal policy, VAT, recession, consumer debt, consumer demand

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This paper concerns the likely impact of a temporary VAT cut stimulus policy on consumer demand in the UK. It suggests that around 75 per cent of the VAT reduction will be passed on to consumers and that consumers will react by maintaining their expenditure levels and therefore increasing their demand for consumption goods. The uncertainty caused by the downturn makes this a more muted impact than we might have hoped, especially on the demand for durable goods. Nevertheless, it is a substantive impact. In general, the uncertainty caused by the recession will tend to reduce the impact of any stimulus package. It is also argued that synchronising the subsequent rise with the economic upturn is critical.

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Government departments used IFS research to inform decision-marking about a temporary cut in VAT.