Germany cuts VAT to 7% to mitigate price shock

Germany cuts VAT to 7% to mitigate price shock

It’s a relief to the German government mired in an increasingly unpopular energy crisis. The European Commission has granted Germany’s request for a temporary reduction in the VAT rate on gas. This will apply from October 1 to March 31, 2024 at the reduced rate of 7% instead of the current 19%, Chancellor Olaf Scholz announced on Thursday, August 18. This should help ease the pressure on consumers as authorities just enacted a controversial tax to support gas distributors. The reduced VAT rate also has an effect here.

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“Fairness is the key to keeping the country together in this crisis,” said the Chancellor at a press conference on Thursday afternoon. There was a lot at stake for Mr. Scholz: the introduction of a new gas tax of 2.419 centimes per kilowatt hour from October 1, announced on Monday, August 15, had caused hostility in the population and business circles. This new levy aims to financially help importers who are forced to buy fossil gas on the market at exorbitant prices to replace that not supplied by Russia. Bound by long-term fixed-price contracts with their customers, these companies risk short-term liquidity bottlenecks. The Uniper Group, the leading importer of Russian gas across the Rhine, therefore announced a horrendous loss of 12 billion euros in the first half of the year on Wednesday, August 17.

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If this tax had the dual benefit of not burdening government budgets and leaving the price signal intact – which could encourage a fall in consumption – it creates a new burden on households and businesses already struggling with record inflation. Olaf Scholz announced that the reduction in VAT on gas should overcompensate for the new tax. Provided companies pass the decline on to consumers, which the chancellor has pledged to do. He also announced that a new domestic aid package would be announced in the coming days. “You’ll never Walk Alone [« vous ne serez pas livrés à vous-mêmes »] he said, the mantra he’s been using for the past few months.

“It’s not a good tool”

Although this correction is to be welcomed, it is not free of criticism from economists. “The reduction in VAT is diluting the desired effect,” criticized Stefan Kooths, Vice President of the Kiel Economic Institute, on Thursday afternoon. In order to save fuel, the price increase is an important signal. Politicians are holding back the increase for consumers overall because they fear the socio-economic consequences. They therefore run the risk of missing the consumption reduction targets necessary for security of supply in the priority sectors. »

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