European VAT: Does France will lower the VAT as the German？
Recently, an OCDE study confirmed what we suspected for a while: the economic crisis caused by the isolation measures adopted by various countries to combat the Covid-19 epidemic had a severe impact on the global economy and even more for France which finds itself with desperate regularity in the small group of underperforming countries.
France’s economic recession in the first quarter of 2020 is the highest in the entire EU region, as shown in figure below-as high as -5.8%.
According to forecasts, the global economy will decline by -6%, with France up to -11.4% and France’s neighbour Germany forecasting figures of – 6.6%.
As countries gradually began to cancel quarantine and return to economic life, governments of various countries began to actively restart the economic machines.
In addition to classic support measures for individuals and businesses, the German government has recently announced that it will stimulate consumption by measures to temporarily reduce the VAT rate. From 1 June to 31 December 2020, the German general VAT rate is reduced from 19% to 16%, and the low tax rate dropped from 7% to 5%. Rather than betting on increased public spending to get out of the crisis, the German government prefers to encourage consumption by reducing the burden on consumers and leave them free to dispose of a larger share of their income. This is because the consequence of increased public spending is inevitably an increase in government debt as well as an increase in the tax burden.
Looking back at the situation in France, the government’s financial situation before the crisis has been quite bad, and the unemployment rate has been relatively high.
French Economy Minister Bruno Le Maire stated in January 2019: “I am fully prepared for further tax cuts, but in this case, we must go further in reducing public spending. “But in fact, the Macron government’s annual budget has told us that the Minister of Economy has not taken any action to reduce public expenditure.
Regarding the reduction of the VAT rate, the Minister of Economy considered that such a measure would not work in France. Based on the following two points:
1) Even if the tax rate is lowered, companies are likely to use this opportunity to increase profits rather than lower prices. Based on the experience of the restaurant industry in lowering tax rates in 2009, the ultimate beneficiaries of lowering the VAT rate are more restaurants than consumers. Compared with France, Germany has a higher overall saving rate of residents, so reducing the VAT rate is a completely reasonable measure for Germany, but not necessarily effective for France. However, the amount of forced savings of the population as a result of the quarantine measures during the epidemic had reached 100 billion euros, and the Government should be more active. Seek to avoid these amounts becoming long-term savings during a recession.
2) Considering the current trade deficit, a lower VAT rate would benefit imports to a greater extent.
The Economy Minister stressed that the problem in France is that for every euro spent by the French, 0.33 of it is on imports. Whereas Germany has a foreign trade surplus of 8% of GDP, France is in a trade deficit, suggesting that France is more active in consumption. The adoption of a reduced VAT rate is therefore not a preferred option for France.
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Source:
https://www.contrepoints.org/2020/06/12/373386-baisser-la-tva-non-bruno-le-maire-ne-fera-pas-comme-lallemagne
https://www.lepoint.fr/societe/relance-la-baisse-de-tva-ecartee-en-france-mais-utilisee-en-allemagne-07-06-2020-2378781_23.php