While households groan under the high inflation, it gives the state significantly higher VAT revenues. There are calls for the federal government to return the money to the citizens – but the state also has higher costs.
Germany took in 187.6 billion euros last year from sales tax, which is often trivially referred to as value added tax. Revenue is expected to increase significantly this year. They are growing just as strongly as prices. If these increase by an average of five percent in 2022, the state would collect an additional 9.4 billion euros. If the level from April – i.e. 7.4 percent inflation – remains until the end of the year, there will even be an additional 13.8 billion euros.
The state also benefits from the high inflation on a second level. It helps to make the national debt more bearable. Although the rate of inflation does not reduce the absolute sum of the approximately 2.4 trillion euros that Germany has to pay its creditors, thanks to the low interest rates and high inflation, the gross domestic product is currently growing significantly faster than the mountain of debt. Conversely, this means that the debt ratio is reduced. This is an effect that caused the German debt ratio to fall by around 20 percent between 2012 and 2019.
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Accordingly, the calls are getting louder that the state should relieve the citizens more. An increase in the basic allowance, the employee allowance and the commuter allowance have already been decided. Federal Finance Minister Christian Lindner (FDP) has budgeted 4.5 billion euros for this year. The opposition and social organizations are calling for further measures, such as a suspension of VAT on staple foods. The CSU would like to suspend the broadcasting fee.
It is not at all certain whether the state will actually see the forecast additional income. The assumption of 13.8 billion euros more in the state coffers assumes that Germans will not limit their consumption, but will buy exactly as many goods and services as last year. And not only private individuals, but also companies should not restrict their activities.
That’s unlikely. In a survey by the Yougov Institute at the end of April, 81 percent said they had already reduced their consumption. Almost half are also postponing planned major purchases. The Germans save mainly on electricity, heating and water, many also use the car less often and don’t go to restaurants, pubs or to the cinema as often. Consumer spending in 2022 is therefore likely to fall compared to the previous year.
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At that time, the Germans spent around 1.76 trillion euros. If nobody restricts their consumption, this value would rise to 1.85 trillion euros in 2022 due to inflation. The state’s possible additional VAT revenue would therefore disappear into thin air if Germans bought 4.8 percent less than in the previous year due to inflation. As an example: The average German household spends around 2500 euros per month. 4.8 percent of that would be 120 euros. For a family of four, this corresponds to an evening at the cinema followed by a meal in a restaurant.
On the other hand, the state also has expenditures that increase due to inflation. Officials drive company cars, offices have to be heated. Spending on infrastructure projects increases as raw materials and construction costs increase. The devaluation of debt will also not work as described in theory above. With inflation, the interest rates that the German government has to offer on bonds in order to find buyers also rise. From December to February, the yield on ten-year bonds shot up by 0.52 percent and was back in positive territory for the first time in years. 30-year bonds are up 0.65 percent in a year. The trend is likely to intensify as soon as the European Central Bank (ECB) raises key interest rates, which in view of inflation is only a matter of time.
With a debt of 2.4 trillion euros, such small changes make a big difference. Although Germany never has to refinance its entire mountain of debt, an interest rate increase of just 0.5 percent causes additional costs of 12 billion euros over the long term. That would eat up almost all VAT revenue.
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