Germany cuts gas VAT to 7% to ease price shock

It’s a relief for the German government, embroiled in an increasingly unpopular energy crisis. The European Commission has accepted Germany’s request to temporarily lower its value added tax (VAT) rate on gas. This will pass, from 1is October and until March 31, 2024, at the reduced rate of 7%, compared to 19% currently, Chancellor Olaf Scholz announced on Thursday 18 August. This should help relieve the pressure on consumers, as the authorities have just adopted a controversial tax to support gas distributors. This too is affected by the reduced VAT rate.

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“Fairness is key to holding the country together in this crisis”, said the Chancellor during a press conference on Thursday afternoon. For Mr Scholz, the stakes were high: the announcement, on Monday August 15, of the creation of a new gas tax of 2.419 centimes per kilowatt hour from 1is October had provoked hostile reactions in the population and economic circles. This new levy is supposed to financially help importing groups, forced to buy fossil gas at exorbitant prices on the market in order to replace that not delivered by Russia. Bound by long-term fixed-price contracts with their customers, these companies risked short-term liquidity shortages. The Uniper group, the leading importer of Russian gas across the Rhine, thus announced, on Wednesday August 17, an abysmal loss of 12 billion euros in the first half.

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If this tax had the double advantage of not digging into the State budget and of leaving the price signal intact – making it possible to encourage a drop in consumption – it creates a new burden for households and businesses, already struggling with record inflation. The reduction in VAT on gas should overcompensate for the new tax, announced Olaf Scholz. Provided that companies pass on the decline to consumers, which the Chancellor has undertaken to enforce. He also announced that a new household aid package would be announced in the coming days. « You’ll never walk alone [« vous ne serez pas livrés à vous-mêmes »] »he said, the mantra he has been using for the past few months.

“It’s not a good instrument”

While this correction is welcome, it is not free from criticism from economists. “The reduction in VAT dilutes the desired effectdenounced Stefan Kooths, vice-president of the Kiel Economic Institute, Thursday afternoon. To save gas, the price increase is an important signal. Politicians hold back the increase for consumers as a whole, because they fear the socio-economic consequences. They thus run the risk of missing the targets for reducing consumption which would be essential for the security of supply in the priority sectors. »

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