Friday, November 25, 2005

News: That VAT thing one more time...

In this post I criticised the Grand Coalition's plan to increase VAT in 2007 to 19%, questioning how they proposed to increase consumer spending and bolster the economy by making stuff, well, more expensive.

Doug left me a question in the comments section, asking if I had any indication why VAT increases were seen by the new coalition as a sensible course of action to improve economic conditions in the Bunderepublik. I answered off the top of my head - I was in the middle of dinner - but the question got me thinking, and so I decided to have a look. Here's what I found...

According to the new Economics Minister, Michael Glos (CSU), quoted on, the logic behind the VAT rise is simple;

"We will receive an economic stimulus as purchases will be brought forward,'' said Glos, 60, in an interview today in Berlin. In 2007, ``we hope that the upswing will have stabilized enough that the dent in the economy that may be caused by the VAT increase can be overcome.''

So basically the idea is to give the economy a shot in the arm. We will all go out and buy cars and computers before the VAT rise kicks in, a short term boost for long term growth. But isn't it long term economic growth that is needed, not just a quick fix to boost spending for a year? And anyway, where's the evidence that this panic-buying, sorry, "economic stimulus", is going to occur over the next 16 months?

One of the problems for the German economy is that no-one is spending anyway. So maybe the 'threat' of increased VAT will actually persuade people to go buy that new car or washing machine now rather than later. But I think the real reason for the lack of 'consumer confidence' or whatever you want to call it is jobs. At present there are a lot of people who either (a) don't have one, or (b) are scared that they won't find one if they lose the one they have got. Large employers, such as Deutsche Telekom, DaimlerChrysler, Volkswagen and Siemens have all announce big job cuts. If you think your job is at risk over the next year or so then that washing machine is going to wait, VAT increase or no increase.

It remains to be seen whether Glos is correct, and this policy will stimulate the purse strings to the point that they loosen, but I remain doubtful. It certainly won't influence my spending plans over the next 16 months or so, although that of course is neither here nor there.

It seems like each time I post I give myself more questions than answers, so if any of you economists out there want to shed some light on how Germany can create jobs, give consumers confidence, and increase spending then I would love to hear from you. Better yet, let Herr Glos know...being Economics Minister in this government ain't going to be easy.


Blogger BerlinBear said...

Interesting post. I too had heard the theory that setting a 2007 deadline would get people spending in 2006, and I had the same questions about it as you have outlined here. I'm not an economist, but I'm very sceptical.

Like you, it's not going to affect my spending plans either. But unlike you, I don't think that that is "neither here nor there." The reason is that, like it or not, we are contributors to the economy. We, like everyone else, are the ones that the government is trying to get throwing cash around to get the economy moving. And if we are not planning to do that, then chances are there'll be literally millions of others who aren't either, which in turn would mean that the success of the measure would be limited at best.

Basically, though I think it's true that increasing consumer spending is the reason for putting the increase off until 2007, it's definitely NOT the reason for increasing VAT in the first place. The reason, I reckon, is that the govt needs either to raise a WHOLE LOT of cash OR to slash spending. They know they won't get away with increasing income tax, which is already very high, and they are (rightly) afraid that if they make the spending cuts which would be required, they'd be turfed out by a voting public which has not yet accepted the necessity of the spending cuts which could and should be made. That really only leaves VAT and closing up a few tax loopholes and tax breaks in order to finance the ongoing public spending. So that's exactly what they've decided to do. I don't fancy it, at all, but I think what it comes down to is Realpolitik pure and simple. A shame, because what they really need is a leader with the charisma and guts to take Occam's razor to public spending AND find a way of making it palatable to the public. No sign of that man or woman anywhere around Berlin at present though, sadly enough.

1:31 pm  

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