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Reduction of VAT gives economy a boost of 0.2 percentage points

Source Datev

Unofficial translation

The temporary reduction in VAT will increase economic output this year by 0.2 percentage points or 6.5 billion euros. This was the result of calculations by the Ifo Institute for its new economic forecast, which Ifo President Clemens Fuest presented on June 29, 2020 to the Bundestag’s Budget Committee. The reduction from 19 to 16 percent from July 1 to the end of the year means tax losses of 20 billion euros.

The background is that the demand for consumer goods produced in Germany does not increase to the same extent as the tax cut. “It does not necessarily follow from this that the sales tax cut should be rejected as an economic policy measure. Supporting companies and easing the burden on consumers in the current crisis can be seen as desirable, even if consumption does not expand significantly, ”said Fuest. “Overall, expectations of stimulus programs should not be too high. In my opinion, it still makes sense and is necessary to support the economy in this critical situation with fiscal policy funds. ”

Of the entire stimulus package, 88 billion euros would be effective in 2020. This will increase economic output this year by around 30 billion euros or 0.9 percent of the gross domestic product. The companies will be relieved by 64 billion euros, the private households by 9.9 billion. The additional government spending amounts to 14 billion euros for 2020.

The head of the Ifo Center for Public Finance and Political Economy, Niklas Potrafke, told the committee: “It should be examined whether some measures can be canceled to reduce new borrowing.” The amortization plan for the supplementary budget envisages returning to the debt brake from 2023 and then repaying the same proportions annually within 20 years. “This amortization plan suggests that no recession is likely to cross the redemption plan within the next 20 years. It is not plausible, ”said Potrafke. Germany should return to balanced public budgets as soon as possible. It should be checked whether the debt brake could take effect again in 2022, especially if the economy picked up in the course of the coming year.