Tax cut fizzles out in large parts of the retail sector

tax cut fizzles out in large parts of the retail sector

The big bang has failed to materialize: one month after the reduction of the value-added tax, doubts prevail in the german retail trade about the benefits of the billion-dollar tax gift to consumers.

In a recent survey by the german retail association (HDE), only 13 percent of businesses outside the food trade rated the tax cut as an effective way to stimulate consumption. But there are clear differences between the sectors, as a survey by the deutsche presse-agentur revealed.

"The boom that was expected from the reduction in value-added tax has not reached us in the fashion trade," reported the chief executive of the textile trade association (BTE), rolf pangels. The term was coined by federal finance minister olaf scholz (SPD) at the beginning of june: "we want to come out of the crisis with a bang," he said after the coalition agreed on a multi-billion euro economic stimulus package.

According to pangels, however, the tax cut of 3 percentage points is simply lost in the 30, 40 or 50 percent discounts that are common in fashion retail at this time of year. "Basically, it fizzles out for us," said industry expert. In addition, the tax cut – if it is applied at all to expensive products such as fine suits or elegant dresses – would bring a significant advantage for the consumer. But just those were hardly bought in corona times because of the cancellation of many events and the trend to the home office.

More positive is the verdict on the economic slowdown in the mobile industry. "Sales tax plays a role in the case of furniture. If you can save a few hundred euros on a kitchen, it’s noticeable and makes some people want to buy it," says jan kurth, managing director of the german furniture industry association (VDM). Since the announcement of the sales tax cut in mid-june, orders for products with delivery times of several months have already risen sharply. And in july, there was also "very brisk demand" for mobile furniture. "We also put this down to the reduction in value-added tax," said kurth. However, the industry is also benefiting from the fact that consumers want to make themselves comfortable at home during the corona crisis and that there is often enough money available for this, as many vacations have been cancelled.

In contrast, skepticism prevails among electronics and household appliance dealers as to the lasting effects of the VAT cut. "We still have no reliable information from market research that anything has changed as a result," emphasizes joachim dunkelmann, deputy managing director of the trade association for technology (BVT). In the high-priced segment – for large televisions, expensive cowsheds or new computers – the tax cut could certainly stimulate purchases. However, in many cases it will probably only be a case of purchases being brought forward, which would otherwise have been made somewhat later. When it comes to replacing a broken coffee maker, a new cable or other small purchases, the tax cut will have no effect on the retail trade. Dunkelmann’s conclusion: "whether it will do the industry any good is open to doubt."

The food trade did not really need any additional wind of change. After all, the industry benefited more than almost any other from the corona crisis. However, it is here that the VAT reduction has had the greatest impact so far. Although it has not led to an additional surge in demand in supermarkets and discounters, it has triggered a price war the likes of which has not been seen for a long time.

Because the discounters aldi and lidl not only passed on the reduction in value-added tax. In order to strengthen their price image, they also added a hefty dollop to it. So lidl didn’t wait until the official launch date on 1. July, but brought the tax cut forward by more than a week at its own expense. Aldi then countered by lowering food prices by three percentage points rather than the two percentage points set by the legislature for the reduced tax rate. What lidl had little choice but to follow suit two weeks later.

The reduction in value-added tax was only the trigger, not the root cause of the price war, emphasized robert kecskes of the gesellschaft fur konsumforschung (gfk) (society for consumer research). "Traders are once again putting the price more in the foreground, because they expect that consumers will soon pay more attention to the cent again when making purchases due to the economic upheavals."

So has the value-added tax cut been a mistake?? Not necessarily, believe the gfk’s economic experts. According to the latest consumer climate study by market researchers, the reduction in value-added tax is definitely making a contribution to the rapid recovery in consumer sentiment in germany. "Consumers apparently intend to bring forward planned major purchases, which will help consumption this year," is how gfk consumer expert rolf burkl summed up their findings. But there is a catch. "Traders and manufacturers must be prepared for the fact that the propensity to consume could decline again when the original value-added tax rate applies from january 2021 onwards."

Only on monday, olaf scholz again rejected a possible extension on sudwestrundfunk radio. "It’s important to say at the beginning when it’s over and not to start discussing changes in between." Then decision-making processes were also extended. But the economy now needs the economic effects triggered by the temporary reduction in value-added tax.

The fact that VAT cuts can have such a resounding effect was experienced by deutsche bahn only a few months ago. After the value-added tax on long-distance rail tickets was cut from 19 percent to 7 percent at the turn of the year, ridership rose by just over one million, or more than 10 percent, in the first month of the new year. However, even the new low fares could not prevent the slump in passenger numbers triggered by the corona crisis a little later.

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