German VAT Hike Will Be Negative For Economy, Study Finds

by Ulrika Lomas, Tax-News.com, Brussels

06 December 2006

The introduction of a 3% increase in the rate of Germany's value-added tax rate on January 1, 2007, is likely to have a significant impact on the German economy, with the net effect on demand likely to be negative, according to the conclusions of a new study.

The Royal Bank of Scotland (RBS) with Bloomberg and NTC Economics have surveyed retailers and service providers across Germany to gauge their expectations of the impact the VAT hike will have - thought to be the first comprehensive study to date quantifying the little-known effects on demand and prices.

The research suggested that nearly 80% of the increase will be passed on to consumers, with most of the impact being felt in January. However, a significant proportion of price rises will also be implemented in advance, with over a fifth of respondents having either already increased prices or planning to do so before the end of the year.

The study went on to find that twice as many respondents (12%) expect either a significant or very significant decline in demand post January as expect a significant or very significant increase in demand, indicating a negative skew to the net impact on consumer demand as a result of the hike.

"These survey results clearly show that it will be a significant macro economic event for the German economy," observed Jacques Cailloux, RBS, Chief Euro Area Economist.

"They point towards a spike in inflation in January, and indicate that while the probability of a subsequent collapse in domestic demand is relatively low, the net effect on demand will be negative," he forecast.

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