In the media | 15 Mar 2024

FT rebuttal: Searching in vain for the Laffer curve boost

In a recent column, Chris Giles made a number of comments related to work undertaken by Oxford Economics on behalf of the Association of International Retail (AIR). The report can be found on our website. For context, the scope of work and central conclusions from this analysis are summarised below:

Chris’s critique of our analysis centred around two points:

  1. “That tax change does not appear to have deterred tourism from non-EU countries. Numbers of visitors to the UK have recovered after the pandemic in a similar way since 2021 to other European countries that did not scrap VAT-free shopping. There has also been no relative decline in visitors from non-EU countries.”
  2. “The most problematic assumption in the Oxford Economics report, however, was that anyone working in retail would be unable to find any work at all without the shopping subsidy.”

On point 1.), we do not consider that any evidence presented by the OBR suggests that the policy has had no impact on tourist behaviour. Since the policy change primarily incentivizes a selective group of tourists, any analysis of highly aggregated data, e.g., total tourism inflows, is not a useful device to identify any effect. Moreover, we think it is noteworthy that the OBR’s analysis, which the article cites, does highlight that, since 2019, visitors to Spain, Italy and France (three major shopping competitors to the UK in Europe) from the United States have rebounded significantly faster compared to the UK. Moreover, the OBR’s analysis does assume that the policy does have an impact on visitor behaviour (both spending decisions and locational choice).

On point 2.), we consider that the article wholly misrepresents the presentation of our analytical work through selective quoting. Specifically, the executive summary of our report concludes as follows:

“Our research indicates that the direct fiscal cost of introducing TFS in the UK would be over 70% lower than implied by the current HMT estimate. This difference arises because of both an anticipated overestimate of the total value of refunds that would be claimed and the failure to capture the policy’s impact on visitor behaviour.

Our modelling indicates that the economic footprint supported by the additional foreign visitor spending would offer a considerable boost to the UK tourism and wider economy, sustaining over 78,000 jobs and £4.1 billion in GDP. Whilst it would be reasonable to contest that this total contribution will not be fully additional, since it will incorporate some level of displacement, the fact that it is being supported by an increase in export revenue implies that the net boost to UK GDP will be significantly higher than a policy that incentivizes UK consumer spending.”

Our reporting, therefore, openly acknowledges that some of this tax contribution would not be net additional to the UK Exchequer. We do not, therefore, assume that “anyone working in retail would be unable to find any work at all without the shopping subsidy”.

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