As part of its Corona Pandemic aid package, the German government surprisingly decided in June 2020 to cut VAT by three per cent (standard rate) for six months starting in July. The aim was to boost private consumption and thereby the economy during the pandemic crisis. How successful was this rather unconventional measure? Is the temporary VAT-cut an impactful instrument to stabilise the economy? A team of researchers around macroeconomics Professor Benjamin Born comes to a clear conclusion in their recently published study: Yes, the temporary VAT cut has noticeably stimulated private consumption and stabilised the economy. They estimate the total effect of increased consumer spending at 34 billion euros.
The temporary VAT cut led to a 36 percent increase in spending on durable goods - such as cars, furniture or electrical appliances - among people who perceived an almost complete pass-through of the VAT cut on prices. Spending on everyday consumer goods such as food, clothing and petrol increased as well. Using surveys from the Bundesbank Online Panel Households and digital transaction information via the Gesellschaft für Konsumforschung, the researchers collected data from over 12,000 private individuals in Germany.
"Our results show that younger citizens in particular, who are not yet as financially secure, have taken advantage of the temporary VAT cut and bought a new car or a bigger fridge, for example," says Professor Benjamin Born.
The complete study is available for download here.