VAT cut leaves the majority cold

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Advertising in a Cologne supermarket: Very few believe that the tax cut will be passed on in full

It is by far the largest chunk in the economic stimulus package against the corona crisis: The temporary reduction in VAT from 19 to 16 percent costs around 20 billion euros. The federal government wants to use it to encourage citizens to shop in the second half of the year - and thus cushion the heavy losses of the past few months for companies. But are the billions well spent?

A study by the Institute for Macroeconomics and Business Cycle Research (IMK) that is available to SPIEGEL comes to a sobering answer. Overall, "a limited impetus for the German economy in the second half of 2020 is to be expected" from the VAT cut, according to the study by the institute, which is part of the union-related Hans Böckler Foundation. It is based on a survey of 6309 employees in the second half of June.

• Three quarters of these respondents stated that they did not want to change their consumer behavior in the second half of 2020 despite the reduction in VAT.

• Only 14 percent, on the other hand, actually want to bring forward expenditure that is planned later - an effect desired by politicians.

• Eight percent postpone previously planned spending until after the tax cut, which is undesirable but also undramatic.

• And just three percent motivated the lower VAT to spend that you would otherwise not have planned.

A buying frenzy looks different.

Where does this reluctance come from? According to the IMK researchers, the question of the extent to which consumers expect companies to pass on the tax cut should play an important role. More than one in three (34.6 percent) do not believe in it at all. A clear majority (58.2 percent) assume that the benefit will only be partially passed on. A mere six percent believe that the reduction will "overwhelmingly" reach the customers - although many chains are currently promising exactly that in advertising campaigns.

So would the 20 billion for the VAT cut have been better spent elsewhere? IMK boss Sebastian Dullien and his co-author Jan Behringer think this is likely. You refer to the child bonus - part of the economic stimulus package for which the comparatively small sum of a good four billion euros is now planned.

The bonus of 300 euros per child is to be paid out in two installments in September and October 2020 together with the child benefit. Families with low and medium incomes in particular benefit from this, because the child bonus is offset against the child allowance but is not counted towards the basic security.

Expenditures by families increased particularly

The study did not ask directly about the child bonus. However, the employed should answer what they would do with a fictitious one-off payment of 1000 euros. On average, 415 euros of the sum would be spent in the next twelve months. More than 78 percent of those questioned said that they would increase their consumption because of the one-off payment.

In addition, respondents with children reported higher spending during the corona crisis, especially those with low incomes. This could be due to the purchase of digital teaching aids or the elimination of free school meals. "On average, half of the child bonus should flow directly into additional consumption and thus have a significant direct effect on private consumption," says the study.

According to the IMK, higher short-time working benefits could also boost consumption. According to the survey, 42 percent of employees on short-time work have recently restricted their consumption, compared with just under 26 percent for employees without restrictions. The decline in consumption was also smaller when the employer topped up the short-time work allowance.

Overall, the effect of the VAT cut "in relation to the considerable volume of this individual measure will be rather limited," the study concluded. "A different weighting of the measures in the economic stimulus package - such as a higher child bonus or a more generous increase in short-time work allowance - would have led to a greater economic stimulus according to these results".