A temporary VAT cut could help stimulate the economy, but only if timed correctly

Reports indicate the government is considering a temporary cut in VAT to stimulate consumer demand, possibly targeted at sectors such as tourism and restaurants. In a new briefing, IFS researchers show that the case for a temporary VAT cut now is mixed. It could provide an important fillip to consumer demand if implemented under the right conditions. But its expiration must be carefully timed so as not to choke off a nascent recovery.

Peter Levell, a Senior Research Economist, said:

"If consumer demand rebounds slowly as we emerge from lockdown, the government will need to think about measures to stimulate the economy. A temporary VAT cut could play an important role in a broader mix of policies aimed at boosting output and employment but only if implemented under the right conditions. There is little point introducing a VAT cut if continued fear of the virus, or continued social distancing restrictions, mean that firms are unwilling to cut prices or consumers are simply unwilling to spend. The government needs to assess carefully the economic situation and benefits of specific stimulus measures over the coming weeks."