Critics lambast reduced gas tax: Policy grounded in won't-fill-can principle

Critics lambast reduced gas tax: Policy grounded in won't-fill-can principle

**"Here we go again with politicking by the bucketful," said Jens Südekum, a member of the Scientific Advisory Board of the Federal Ministry of Economics, in an interview with Reuters on Thursday. "This is a misstep," he asserted. "What's needed is a policy that lets price signals steer the ship, with support where it's crucial—for people with smaller and medium-sized incomes," said the Düsseldorf professor. "The Value-Added Tax (VAT) decrease on gas misses the mark on both counts."

It also benefits the well-off, a sector the government can't currently assist. Moreover, incentives to conserve gas are diminished. "So, exactly the opposite of what's needed is accomplished," said Südekum.

Scholz had earlier announced that the VAT on gas would be reduced from 19 to 7 percent by March 2024, a move intended to ease citizens' burden. According to government sources, this reduction would take effect from October. "This will reduce inflation by an estimated 0.3 percentage points," said Jörg Krämer, Commerzbank's chief economist. "For October and November, we no longer expect an inflation rate significantly above nine percent, but around nine percent."

While it's good that the government doesn't seek profit from the gas surcharge, Krämer stated, "they could have presented stronger motives for conserving gas if they had provided financial relief to citizens not via the gas price, but directly."

Michael Holstein, DZ Bank's chief economist, shares similar sentiments. "Financial relief for citizens benefits their wallets, which in turn benefits the economy," said Holstein. "However, high energy costs should encourage conservation, not be reduced or capped by the government." This approach evokes memories of the costly fuel discount, which ultimately didn't offer enough relief. A better approach would be to help households with lower incomes specifically and directly. "That's what the social market economy is for, especially in times of crisis."

Germany's temporary VAT reduction on natural gas, part of broader energy crisis responses, has faced criticisms and sparked debates about more sustainable financial relief measures. Critics argue that while the VAT cut may provide short-term relief, it doesn't address underlying price structures and disproportionately benefits wealthier households. Proposed alternatives include permanent VAT restructuring, direct subsidies, and incentivizing renewable energy adoption through phasing out VAT rates for fossil fuel components. This shift reflects growing emphasis on structural reforms over temporary tax adjustments to address both financial relief and sustainability goals.

1. Jörg Krämer, Commerzbank's chief economist, suggests that the government could have provided financial relief to citizens directly instead of via the gas price reduction.
2. Michael Holstein, DZ Bank's chief economist, agrees that financial relief for citizens benefits the economy, but argues that high energy costs should encourage conservation, not be reduced or capped by the government.
3. Critics argue that the temporary VAT reduction on natural gas, while providing short-term relief, doesn't address underlying price structures and disproportionately benefits wealthier households.
4. Proposed alternatives to the VAT reduction on natural gas include permanent VAT restructuring, direct subsidies, and incentivizing renewable energy adoption through phasing out VAT rates for fossil fuel components.
5. The shift towards structural reforms, such as these alternatives, is a response to the growing emphasis on addressing both financial relief and sustainability goals.

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