Paris (AFP)

Among the many measures taken on both sides of the Rhine to revive the economy after the health crisis, a temporary drop in VAT was decided in Germany, but rejected by the French government. The use of this tax lever raises several questions.

Would a drop in VAT affect prices?

Difficult to know in advance to what extent this tax cut would benefit consumers or businesses.

"We have had a few experiences in the past which show that a drop in VAT could above all be used to restore margins rather than to lower prices and encourage consumption," it is said in Bercy.

The introduction of a reduced rate VAT in catering in 2009 had indeed benefited restaurateurs more than their customers.

But "as we are in crisis, it is not very serious since if companies have margins, that translates into jobs", objected Ludovic Subran, chief economist of the insurer Allianz.

Can lower VAT stimulate demand?

According to Bercy, "the rate of household savings, structurally, is higher in Germany and therefore a drop in VAT can quite be justified in Germany when it is not necessarily so in France".

"Forced" savings, which was built up during confinement in France, are approaching 100 billion euros. The government is trying to prevent it from turning into precautionary savings over the long term during a recession.

However, in France, "given the narrowness of the budgetary room for maneuver, we are forced to react at the right time and in a targeted manner", notes Emmanuel Jessua of the Rexecode Institute.

"We haven't yet had any real data on consumption since deconfinement. We will have to look on a case-by-case basis for the products for which there could actually be a delay in ignition for demand," he added.

And "if household consumption is still too cautious for certain types of goods, we can envisage targeted support" as for the automobile with measures which "try to direct demand towards political and ecological priorities" like the vehicle electric, advocates this economist.

For Mr. Subran, on the other hand, "we risk having a much stronger recovery in Germany because they will have done what most books say" on economics, by taking transversal measures to stimulate both Offer and demand.

He also noted that the United Kingdom had successfully used the VAT cut during the financial crisis in 2008-2009.

Is the cost of lowering VAT too high for public finances?

In Bercy, it was pointed out that the measure would be expensive. In France, VAT weighs almost 45% of state tax revenue, compared to around 30% of that of the federal state and the Länder in Germany.

On the other side of the Rhine, where the level of public debt is lower than in France, lowering the standard VAT rate from 19% to 16% and the reduced rate from 7% to 5% for six months in the second half of 2020 will cost 20 billion euros.

Could a drop in VAT worsen the trade deficit?

The Ministry of Economy fears "little targeted devices that benefit everyone and in particular imported consumption".

"The share of capital goods imported into France is 70% and therefore there is a high probability that it will mainly benefit imports," said Bercy.

"The problem in France is that for one euro spent, there are 33 cents imported", also notes Mr. Subran.

Germany has a surplus of foreign trade which reaches 8 points of GDP while France is in deficit, "which shows that we have a consumption which is more dynamic", underlines one still with the ministry.

© 2020 AFP