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Has the Reduction in Value-Added Tax Stimulated Consumption?

Clemens Fuest, Florian Neumeier, Andreas Peichl
ifo Institute, Munich, 2021

ifo Schnelldienst digital, 2021, 2, No. 01, 01-06

We investigate whether the reduction in VAT has induced citizens to make larger purchases, as was the German government’s goal. According to our results, this goal was not achieved as hoped. Only 2 percent of respondents who made major purchases in the period from July to October 2020 would have refrained from making these purchases without the reduction in VAT. Only 12 percent of those still planning to make purchases by the end of the year would forgo them without the reduction in VAT. Extrapolated to all households in Germany, this results in a macroeconomic consumption effect of around EUR 6.3 billion. This is not quite one-third of the estimated fiscal costs of the measure, which amount to EUR 20 billion. In relation to private consumer spending in 2019, the reduction in VAT thus led to a relative increase in domestic consumption of 0.6 percent. A temporary 2.5 percentage point reduction in VAT in the United Kingdom in 2008¬–2009 achieved an estimated increase in consumer spending of 0.4 percent. The main reasons for reduced consumption include expected higher spending in the future and coronavirus-related restrictions on shopping.

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ifo Institute, Munich, 2021