On this occasion it happened in a matter of weeks. The idea that consumer spending would come back quite quickly once infection rates had begun significantly to decline – faster, in particular, than in the “average” economic recovery – was something built in to the MPC’s “scenario” last May, early on in the pandemic. At the time, there was quite a bit of scepticism about this and many judged it to be too optimistic. For my part I think there was every reason to expect a relatively sharp recovery – slower, perhaps than the precipitous drop but nonetheless faster than in a typical economic upswing. In the event spending came back even faster during the summer than we’d expected in May. The same was true in other countries. And the interesting thing about these simple simulations (to the extent one attaches any credence to them) is that they suggest that the initial downturn in aggregate spending may have been as sharp as it was precisely because it was likely to be short-lived. The role of the furlough schemes was obviously critical here. One of the reasons “normal” recoveries in consumption are more protracted is because drops in output feed through to household incomes, via hits to employment and wage growth. This feedback slows down the dynamics of the average cycle. The schemes helped to interrupt that loop.
However, going out to eat still costs far more than it did, relative to other stuff. So you’ll probably be inclined to go less often. But what do you do with the money you would’ve spent? Do you simply switch it to other things, leaving your aggregate consumption unchanged? Or do you reduce your total spending as well, and instead save a little more? At least for the idealised consumer of simple economic theory, two things turn out to matter for this decision. One is the extent to which there are other, close substitutes for the taxed activity. If you liked cooking at home, or indeed anything else, almost as much as going to a restaurant you’d be more inclined to switch your spending immediately to these other things. Your total consumption wouldn’t change much. In general, a hike in a particular sales tax will have smaller effects on aggregate spending, and result instead in more expenditure-switching, if it’s levied on something for which there are similar (and untaxed) alternatives. The other important factor is how long you expect the policy to last. If he thinks the tax hike is permanent, our idealised consumer of economic theory would substitute his spending straightaway towards other goods or services, regardless of whether they’re close substitutes. If not – if he expects the government to come to its senses at some point, and reverse the policy – he’ll be more inclined to wait until that happens.