Journal Article

Assessing the temporary VAT cut policy in the UK

Date: 15 April 2009
Publisher: Wiley Blackwell
Published in: Fiscal Studies, Vol. 30, No. 1, March 2009 , Vol. 30, No. 1, pp. 31-38
JEL classification: H2, H3, E21

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.