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The Economics of a Reduction in VAT (2009)
| Citations: | 5 - 0 self |
BibTeX
@MISC{Barrell09theeconomics,
author = {Ray Barrell and Martin Weale and London Swp He},
title = {The Economics of a Reduction in VAT},
year = {2009}
}
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Abstract
We explore the effects of a temporary cut in VAT, identifying three possible effects: an income effect as people benefit from a lower cost of living during the period of the reduction, a substitution effect as people bring their consumption forward and an arbitrage effect as people buy non-perishable goods before the end of the period of low VAT for consumption after the VAT rate as been raised. International evidence suggests a clear overall impact on consumption, although the nature of the pattern depends on the way in which the data are analysed. However, the key policy issue is the impact of the VAT change on output and to examine that a simulation model of the whole economy is needed. Evidence from the National Institute’s Global Economic Model suggests that the impact of the recent VAT reduction is likely to build up during the course of 2009. The reduction in VAT from 17 % to 15 % is likely to result in consumption being augmented by less than 1 per cent by the fourth quarter of 2009. However GDP is likely to be raised raised by less than half a per cent relative to what would have happened without the VAT increase. After the temporary reduction is over both consumption and GDP are depressed as a result of the policy.
Keyphrases
key policy issue low vat fourth quarter non-perishable good vat rate clear overall impact substitution effect arbitrage effect possible effect whole economy income effect simulation model vat increase temporary reduction recent vat reduction national institute global economic model international evidence temporary cut per cent relative vat change
