Follow us
Publications Commentary Research People Events News Resources and Videos About IFS
Home Publications Using a temporary indirect tax cut as a fiscal stimulus: evidence from the UK

Using a temporary indirect tax cut as a fiscal stimulus: evidence from the UK

IFS Working Paper W14/16

This paper evaluates a novel form of fiscal stimulus: a temporary cut in the rate of Value Added Tax (VAT). In December 2008, the UK cut the standard rate of VAT by 2.5 percentage points for 13 months in an effort to stimulate spending. We estimate the effect of the cut on prices and spending using alternative strategies for identifying the counter-factual. Although firms initially passed through the VAT cut by lowering their prices, at least part of the pass through of the VAT cut was reversed after only a few months. Despite this early reversal, the cut raised the volume of retail sales by around 1% which on its own generates a 0.4% increase in total expenditure. The cut raised retail sales by encouraging consumers to bring forward their purchases and we find a significant fall in sales after the VAT cut ended. Thus an indirect tax cut stimulates significant intertermporal substitution in purchases.

More on this topic

IFS Working Paper W21/21
We demonstrate the range of impacts a tax on added sugar and salt could have on purchases of food at home and out of the home in the UK. The impact will depend on how firms and consumers respond.
IFS Working Paper W21/18
The COVID-19 pandemic has led to significant changes in where people work, eat and socialise. We use novel data on the food and non-alcoholic drink purchases from stores, takeaways, restaurants and other outlets to quantify the impact of the pandemic on the diets of a large, representative panel of ...
Press release
Using data on millions of food and non-alcoholic drink purchases from stores, takeaways and restaurants, the analysis shows that: by May 2020, total calories were 15% above normal levels. During the second half of 2020, they were still, on average, 10% higher than usual.
Journal article | Fiscal Studies, Volume 42, Issue 2
Shopping trolley in a supermarket
Press release
During the first national lockdown, spending plunged by around a third. But from October to November (the second English lockdown), spending in England increased by about 2%. While that’s considerably weaker than the 10% growth seen in Scotland over the same period, clearly the effects of the ...