Critical remarks aimed at the reduced gas tax - Economic analysts deem this strategy as adhering to the 'Keg in a Bar' metaphor
In a recent announcement, Olaf Scholz, the German Chancellor, declared plans to reduce the value-added tax (VAT) on gas from 19 to 7 percent by March 2024 to alleviate citizens. However, the policy has drawn criticism from economists like Jens Südekum and Michael Holstein, who argue that the measure may not effectively target financial relief towards low-income households and could potentially undermine efforts to incentivize gas savings.
Jens Südekum, a member of the Scientific Advisory Board of the Federal Ministry of Economics, has stated that the current policy on reducing VAT on gas is a step in the wrong direction. According to him, the policy does not allow price signals to work and does not provide adequate relief for people with small and medium incomes.
Similarly, Michael Holstein, the chief economist at DZ Bank, evaluates the measure in a similar light. He believes that reducing VAT misses both marks, as it broadly lowers the price for all consumers, including those with higher incomes who may use more gas. This, in turn, dilutes the impact of the measure on promoting reduced consumption and misses a more equitable distribution of fiscal support.
To address these concerns, experts suggest a more targeted approach that combines financial aid with pricing signals to maintain incentives for energy conservation. Instead of a blanket VAT cut, the government could consider:
- Providing direct subsidies or vouchers to low-income households specifically to alleviate their energy cost burden.
- Maintaining or only partially reducing VAT on gas prices to preserve price incentives that encourage reductions in consumption.
- Introducing a tiered VAT or differential pricing system where lower consumption brackets get tax relief but higher users pay more, thus encouraging energy savings.
- Complementing fiscal measures with energy efficiency programs and information campaigns aimed at reducing overall gas consumption.
Such an approach balances financial relief with environmental objectives by shielding vulnerable groups from high energy costs while maintaining economic incentives to reduce gas use.
Michael Holstein's approach is reminiscent of the expensive fuel discount, which did not provide enough relief. However, he believes that financial relief for citizens is positive for the economy, especially in times of crisis, as it aligns with the principles of the social market economy.
Jörg Krämer, chief economist at Commerzbank, has stated that this reduction will reduce inflation by an estimated 0.3 percentage points. For October and November, according to him, inflation is no longer expected to be significantly above nine percent, but around nine percent. According to government circles, this reduction is expected to apply from October.
Despite the criticism, there is no explicit German government or Bundesbank statement on reforms to VAT on gas in the results. However, the Bundesbank notes the economic challenges from energy and tariff-related uncertainty, implying the need for careful fiscal policy (such as targeted support rather than broad tax cuts) to stabilize growth.
In summary, the criticism is that the VAT cut is too broad and insufficiently targeted, potentially reducing incentives to save gas and giving financial benefits to higher-income groups unnecessarily. A more targeted approach would rely on targeted support for low-income households combined with maintaining incentives to conserve energy.
The current VAT reduction policy on gas, as suggested by economists like Jens Südekum and Michael Holstein, is viewed as a misguided step because it does not effectively relay price signals or provide adequate relief for people with small and medium incomes.
To address concerns of insufficient targeting and increasing gas consumption, experts propose a combination of financial aid and pricing signals, such as direct subsidies for low-income households, maintaining or partially reducing VAT on gas, introducing a tiered VAT system, or complementing fiscal measures with energy efficiency programs.
