Taxes Increasing: VAT Hike Set for January, According to Finance Minister
In the midst of the ongoing COVID-19 crisis, German Finance Minister Olaf Scholz has made a significant decision regarding the reduced Value-Added Tax (VAT) in Germany. Despite calls for an extension, Scholz has ruled out any such move, citing a shift towards fiscal sustainability and a gradual return to normal tax rates [1][2].
The reduced VAT, part of a €130 billion stimulus package introduced in mid-2020 to mitigate the immediate economic impact of the pandemic and stimulate consumer spending [2], was set to expire on December 31. Scholz, as Chancellor, had referred to these stimulus efforts as "Wumms" ("oomph"), emphasizing their powerful but temporary nature [2].
By 2025, despite ongoing economic challenges, there was a political and economic preference for ending the temporary VAT cuts rather than extending them indefinitely. This decision likely stems from concerns about fiscal balance, potential inflationary pressures, and the need to shift to longer-term economic policies [1].
Scholz's stance aligns with broader efforts to phase out emergency pandemic measures and pursue sustainable fiscal and tax policies amid evolving economic conditions [1]. The minister's decision is a testament to Germany's financial and fiscal strength, which allows the country to handle the crisis effectively [3].
In a statement to the "Tagesspiegel", Scholz confirmed that the reduced VAT was deliberately made temporary. He also emphasized that in a crisis, there's a risk that citizens will hold back and wait for better times. If an entire nation does this, it will not get out of such a crisis for 10, 15 years [4].
Despite the ongoing crisis and continuing restrictions for many sectors, the higher VAT rate is set to apply again from January. However, the minister assures that the focus remains on necessary spending and ensuring the country gets through the crisis safely [5].
On the positive side, the situation on the labor market is better than expected, with turnover having recovered remarkably in Germany [6]. Companies in Germany are also developing well, and the "bazooka" (financial aid package) is still in effect [7].
Scholz believes that the reduction in VAT was designed to encourage larger purchases despite the crisis, and it has been effective. By reducing the regular VAT rate from 19 to 16 percent, and the reduced rate from 7 to 5 percent as of July 1, the government aimed to boost consumer spending and stimulate economic recovery [8].
In conclusion, Scholz's decision to rule out an extension of the reduced VAT reflects a balanced approach to crisis management, prioritizing both short-term relief and long-term fiscal stability. The German economy, under Scholz's careful handling, continues to show signs of resilience amid the ongoing pandemic.
Other businesses may need to adapt to the higher VAT rates starting in January, as the reduced VAT rates are set to expire. The government's decision to phase out the emergency pandemic measures, starting with the VAT cuts, indicates a focus on sustainable finance and long-term economic growth.
