Unfiltered Analysis: Tax Cuts Ain't Boosting Munich's Economy, Ifo Institute Report Suggests
In a Nutshell:
Reduced Value Added Tax (VAT) yields minimal effectiveness, suggests study analysis.
The temporary reduction in value-added tax barely impacted economic growth, according to the Ifo Institute's analysis, as reported in the Handelsblatt.
The Deets:
Andreas Peichl, one of the study's authors, shares that the goal of the value-added tax reduction was to stabilize the economy by boosting domestic consumption. However, the results suggest it didn't quite work out as planned. The total economic consumption effect was about 6.3 billion euros, which corresponds to a 0.6 percent increase in domestic consumption directly due to the tax reduction.
The consumer incentive for the government came at a hefty cost of 20 billion euros, making it the most expensive measure in the federal government's economic stimulus program. Besides, only two percent of respondents said they made a larger purchase between June and October that they would have postponed sans the tax reduction. Meanwhile, 12 percent plan to make a larger purchase in 2020 that they wouldn't have made without the state's consumer incentive.
Televisions, computers, mobile phones, larger building and renovation activities, and furniture dominated the purchases, according to the survey. The Ifo researchers extrapolated the expenditure of the respondents to all households in Germany, resulting in the 6.3 billion euros estimate.
What's this Got to Do with the Economy?
Well, the costs and benefits of the measure are unfavorable, as the temporary reduction in value-added tax only got a relatively minor effect on economic growth. The Ifo Institute surveyed households in October and November about their consumption intentions.
For the Curious
- In general, analysts expect a broader package of tax incentives, including the VAT reduction, to deliver a significant stimulus, with an estimated economic boost of €57 billion in 2026. [1][2]
- The total effect of all tax-related measures is projected to significantly support economic growth in the coming years.
- However, the precise impact of the VAT cut alone on growth is not isolated in current public reporting.
[1] Source 1[2] Source 2 (German)
Other industries in the finance sector may have benefited from the temporary reduction in value-added tax, as increased consumer spending could lead to increased demand for loans and credit. However, the business implications of this tax cut for Munich's economy are questionable, as the results of the Ifo Institute's analysis suggest that the measure had a relatively minor effect on economic growth.
%20yields%20minimal%20effectiveness%2C%20suggests%20study%20analysis.){kind=link}