The Impact on Consumer Spending of a Cut in the Fixed-Rate Tax Reduction
September 01, 2004
(1) On the assumption that the fixed-rate tax reduction is cut by half, estimates of the fall in consumption expenditure in conjunction with the decline in disposable income by annual income band suggests that the reduction will depress annual consumer spending by 0.45% (\1.3 trillion).
(2)Given the scale of this estimate and the four points below, it seems a little early to discontinue or cut the fixed-rate tax reduction. Even if the tax reduction is cut, the cut should, as far as possible, be kept to a scale that will not have a negative impact on consumer spending.
Given the slow improvement in income conditions and the various increases in the household burden that have already been decided, a 0.45% fall in consumer spending is by no means small.
The cutting of the tax reduction from fiscal 2005 onwards may coincide with a deceleration of the economy and trigger a recession.
Economic recoveries over the past two years have boosted tax revenues to a higher than expected level.
The future of the pension system is uncertain and as public concern has yet to be assuaged, it will be difficult to obtain public approval for abolishing the tax reduction as a source of funding.
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