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How much use is a brief, small VAT reduction?

by Scott Bicheno on 25 November 2008, 17:57

Tags: HM Treasury

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Drop in the ocean?

Yesterday, in his pre-budget report, Chancellor of the Exchequer Alistair Darling revealed the latest government measure designed to lessen the severity of the recession even he admits will last for another year.

Here are some selected excerpts from his speech:

"Monetary policy - interest rates - on its own is not enough to stimulate the economy, as most people recognise. So we need action now - to boost economic activity - together with the real help I will announce today, to help us emerge quicker."

 "That's why my Pre-Budget Report today represents a substantial fiscal loosening - to help the economy now - with a £20bn fiscal stimulus between now and April 2010, around one per cent of GDP."

"I can announce today that £3bn of capital spending will be brought forward from 2010/11 to this year and next. It will put people to work, renovating infrastructure, modernising schools, and creating more fuel efficient homes."

"Mr Speaker, this spending will help put money into the economy in the coming months. But to prevent the recession deepening, we also need to take action to put money into the economy immediately."

"I therefore propose to cut VAT from 17.5 to 15 per cent until the end of next year. This VAT reduction will come into effect next Monday on December 1st. It will continue for 13 months before returning to the present level of 17.5 per cent at the beginning of 2010 by which time we expect the recovery to be underway."

"This temporary reduction is the equivalent of the Government giving back some 12 and a half billion pounds to consumers to boost the economy. It will make goods and services cheaper and, by encouraging spending, will help stimulate growth."