Stimulus effect of the UK 2008 VAT rate cut

About this event

When the interest rates hit historical lows during the financial crisis, governments around the world started to use fiscal policy to stimulate the economy. In the UK, the standard VAT rate was cut from 17.5 to 15 percent for a period from 1 December 2008 to 31 December 2009. Business activities subject to zero or reduced VAT rate, however, continued to work with pre-cut tax rates. The government advertised this, as a timely, targeted, and temporary fiscal stimulus that could boost consumption. In this paper, I use the universe of monthly VAT returns submitted to HMRC from April 2002 to December 2010 to estimate the stimulus effect of the standard rate cut on value added. I employ a difference-in-differences strategy and compare changes in value added for traders involved in standard-rated activities to changes in value added for zero/reduced-rated traders before and after the standard rate cut. Graphical evidence suggests the VAT cut didn't raise the value added of standard-rated traders. Even within the retail sector, it seems the rate cut was not very successful in boosting purchases of standard-rated traders (e.g. durable household good retailers) relative to zero-rated traders (e.g. food retailers).