How to spend it? Vouchers versus vat cuts
|The bleak outlook for the labour market implies there is a strong case for measures to boost consumer spending in order to keep the recovery on track. A host of instruments can be considered: vouchers, VAT rate cuts, income tax cuts, tax credits, negative income taxes. Amongst these, a voucher programme offers many advantages given the possibility for fine-tuning the target group, the final beneficiaries, the type of spending and the regional dimension. However, it comes with considerable administrative costs.
Survey, activity and spending data are improving in countries where the lockdown measures have been eased. At the same time, the frequency of corporate restructurings and announcements of lay-offs has increased, painting a bleak outlook for the labour market.
Given the weight of household consumption in GDP1 , there is a strong case for trying to boost consumer spending in order to keep the recovery on track. Several countries have already taken initiatives in this respect, such Germany -temporary VAT cut, incentives to buy electrical car- or France -incentives for buying environment-friendly cars. In general, a variety of measures can be considered to stimulate spending. In addition to those already mentioned, there are vouchers, income tax cuts, tax credits2 , negative income taxes3 , etc.
The choice may depend on different factors. First, there is the ease and speed of implementation. Tax cuts, tax credits and negative income taxes score high in this respect whereas distributing vouchers take more time and are administratively cumbersome. Second, there is the question of how fast the additional spending power becomes available. For VAT cuts, once passed into law, this can be quick. For vouchers it takes more time as it depends on the efficiency of the distribution system whereas an income tax cut only leads to higher spending power with considerable delay.
A third, important consideration is the possibility to target the beneficiaries. Rather than having everybody benefitting, a government might want to reach low income households or people having lost their job. Such a preference can be based on ethical grounds –helping those who suffer most- but also on economic considerations because these target groups can have a higher marginal propensity to consume out of extra income. This would imply a bigger bang-per-buck for the economy at large. This type of targeting is very much feasible with vouchers and income tax measures but not with VAT cuts.
Forth, the ability to focus on certain expenditure items is high in case of vouchers and VAT reductions but is absent for the other measures. Governments might want to focus on certain goods and services, in an effort to kill two birds with one stone –e.g. a subsidy for buying an electric car has an economic effect but is also welcome in the context of climate change policy-, to favour certain sectors which suffer from subdued demand and high unemployment or to target activities with a high domestic value added and a low import content.
Fifth, vouchers can also be limited to people living in certain regions, towns and villages. The rationale would be based on a bigger multiplier effect in those parts of a country suffering from a deeper recession. The regional or local government could introduce such a programme as well. Income tax related measures could also be deployed regionally. Sixth, in case of vouchers, the cost of the initiative is known in advance4 . For several other measures, any estimate will be very imprecise and depend on hypotheses. Finally, there is the important question of who is the direct financial beneficiary5 . For most instruments, this is the household but in case of a VAT reduction, producers including shopkeepers may try to keep some of the benefit for themselves by lowering their prices less than the decline in indirect taxes.
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