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MPs cast doubt on VAT reduction

28 January 2009
Categories: News , VAT
Cut was optimistic, says Treasury Committee

The Government's temporary 2.5% decrease in the standard rate of VAT has been met with doubt in ministers’ analysis of the Pre-Budget Report.

The move was an ‘optimistic’ attempt to revive the economy and must be continued to be monitored, according to the Treasury Committee, which today published its report on November's announcements by the Chancellor.

The PBR estimated that the VAT cut will cost £16 billion but will this year deliver an overall fiscal stimulus of around 1% of GDP in total.

Bank of England deputy governor Charlie Bean told the committee’s MPs that such a reduction was preferable to a cut in income tax because the latter might be saved by individuals, rather than spent.

Lower VAT, said Mr Bean, ‘gives households an incentive to bring forward some spending from the future to the present in some sort of switching over time’.

He added that ‘during the second half of [2009] there will be a lot of advertisements saying: “Buy now before VAT goes up in January 2010”’, which will encourage expenditure-switching.

Simon Kirby of the National Institute of Economic and Social Research suggested, however, that the credit crunch might adversely affect the ability of households to take advantage of the 15% VAT rate.

‘The problem is that we are currently in a banking crisis and we have households and firms that are credit constrained,’ he said.

These remarks and those from other commentators led the Treasury Committee to remark that ‘the cost of the reduction in VAT is considerable and… the Treasury’s analysis of its impact is an optimistic one’.

The MPs pledged to continue to monitor the VAT reduction's effect ‘as part of our ongoing work, and [we] will return to this issue at the time of the Budget’.

The Forum of Private Business (FPB) welcomed the committee's remarks.

The lobby group went on to say that 'small businesses need significant tax relief, not half measures that many smaller retailers found impossible to pass on because of the administrative costs involved and the short time they were given to implement the change'.

Categories: News , VAT
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