Researchers dismiss complaints from the catering industry

Researchers dismiss complaints from the catering industry

Many restaurants are still groaning under the consequences of the pandemic. They feel their existence is once again threatened by the return to the regular VAT rate. However, the industry's arguments do not stand up to scientific scrutiny.

The restaurant industry is predicting a mass death of businesses and a price shock for guests. The next dispute within the coalition is in full swing. This is because the reduced VAT rate in the sector will end at the turn of the year. Minister President Manuela Schwesig wants to prevent this in the Bundesrat, citing the high energy and food prices under which restaurateurs are suffering. However, scientific studies do not confirm the predicted horror scenario. According to economists, at least parts of the food service industry are doing better than claimed. They consider further subsidies to be unfair.

The industry was one of the biggest losers of the coronavirus pandemic, with around 25,000 businesses forced to close for good over the two years. Despite government aid such as grants and loans, short-time work benefits and, last but not least, the reduction in VAT on food from 19% to 7%. According to the Federal Statistical Office, in the first half of 2023, inflation-adjusted sales in the catering industry were still twelve percent below the pre-crisis level of 2019. However, according to a study by the IFO Institute, restaurants in major cities have already recovered and their sales are above the pre-corona level when adjusted for price. In the cities surveyed - Berlin, Munich, Hamburg, Stuttgart and Dresden - some sales have also shifted to the suburbs and weekends, which the researchers attribute to the spread of working from home.

Restaurateurs raise prices significantly

The sector also increased its prices more than the economy as a whole - despite the reduction in VAT. "Businesses have therefore managed to pass on some of their increased costs for staff, food and energy without guests staying away," write the IFO researchers. According to the Federal Statistical Office, food in restaurants is currently around a fifth more expensive than in January 2021. Compared to last February, when the war in Ukraine began, it is a good 14% more.

According to researchers at the Leibniz Centre for European Economic Research Mannheim (ZEW), the comparatively high price increases have probably created "a certain amount of leeway in margins, at least for part of the industry". In their view, this leeway should absorb some of the price pressure resulting from the VAT increase. According to the German Hotel and Restaurant Association (DEHOGA), the average return on sales fell to 3.9 percent last year.

The authors of the ZEW study assume that forward-looking restaurateurs raised their prices so sharply because they had already factored in the fact that VAT would rise again for them - as announced in principle. The economists write that it is therefore not plausible to expect a price shock with the normalized VAT being passed on in full to customers. The reduction in the pandemic had been extended until the end of this year due to the energy crisis. During the 2021 election campaign, however, Chancellor Olaf Scholz promised: "We'll never abolish it again."

1.70 euros more for a plate of pasta?

If the return to 19% VAT were to be passed on in full to restaurant customers, a pasta dish currently costing €15 would soon cost €16.68, for example. Current prices could rise by 11.2 percent. DIW economist Marcel Fratzscher anticipates a price increase of around ten percent: "It is likely that 70 to 80 percent of the twelve percentage points that VAT will now increase in restaurants will be passed on to customers."

However, because it is still unclear what proportion will ultimately be passed on to customers, the ZEW researchers do not want to assess how much the industry's turnover and the number of businesses could fall as a result. This is how co-author Daniela Steinbrenner explains it in an interview with ntv.de. DEHOGA has predicted the demise of 12,000 businesses. Steinbrenner says: "An exact estimate of the closures depends, among other things, on the extent to which restaurateurs have taken the increase into account in their price calculations so far."

Either way, the ZEW economists do not consider a permanently lower VAT to be justified. It is a "tax subsidy that is currently associated with annual tax losses of a good three billion euros", explain the corporate taxation experts. "If the time limit were lifted, these costs would increase continuously in line with the nominal growth in turnover in the sector. Total costs of around 38 billion euros would be expected over the next decade, which would have to be offset by higher taxes elsewhere or spending cuts."

VAT reduction favors the wealthy

In some rural areas, the catering industry is in a much worse position than in the big cities. As industry turnover is still below the pre-corona level overall, but above it in the cities with high purchasing power, many restaurants are still struggling. "Parts of rural areas outside the metropolitan regions have not recovered," IFO study author Carla Krolage told ntv.de.

However, in the eyes of economists, including economic experts Monika Schnitzer and Fratzscher, the justification for lower VAT no longer applies with the end of the pandemic. The structural change in the industry should not be accompanied by permanent subsidies. ZEW Head of Department Friedrich Heinemann calls the "campaign by lobbies from the catering and wholesale sectors" "loud and aggressive". The "very expensive concession" is "socially problematic because it particularly benefits the wealthy".

Although the DEHOGA refers to normal earners, the average expenditure on restaurant visits increases with household income. This means that the lower VAT benefits wealthy households more than poorer ones. The researchers only see fair relief for meals in schools and kindergartens. Here, poorer parents are supported by lower VAT in the same way as richer parents.

"Disappearance of village pubs is a long-term trend"

Most EU member states apply a reduced VAT rate in the catering sector. However, the ZEW economists do not believe that German businesses are at a disadvantage because they offer their services locally. The researchers also do not accept other arguments for a reduction, such as inflation, a shortage of skilled workers and restaurants as a cultural asset.

The labor shortage affects the entire German economy. "Subsidizing selected industries would only shift the problems between sectors." In addition, tax shortfalls in VAT would "increase the pressure to raise other taxes such as income tax and even exacerbate the labor shortage by further reducing incentives to perform".

The researchers are also not convinced that a lower VAT rate could save restaurants in city centers and villages that are no longer well frequented. "The disappearance of village pubs is a long-term trend that ultimately reflects changing preferences and lifestyles," the authors write. "Tax subsidies should be justified with substantial substantive arguments for which there is also empirical evidence."

According to the economists, the accusation that the increase in VAT is fueling inflation, as CSU leader Markus Söder also complains, is false. Chief economists from banks assume an effect of 0.1 to 0.2 percentage points on the inflation rate. However, the ZEW researchers believe that combating rising prices with subsidies makes little sense in macroeconomic terms. This is because subsidizing catering services promotes private consumption. While the European Central Bank is trying to dampen demand and thus inflationary pressure by raising interest rates, fiscal policy should not do the opposite, the researchers explain. "Costly crisis measures" despite the end of the pandemic would ultimately be counterproductive for lasting price stability.

1. Despite the predicted increase in VAT from 7% to 19%, economists argue that some parts of the food service industry have managed to absorb the price pressure through the leeway in their margins.
2. The reduction in VAT on food was one of the measures implemented to support the catering industry during the pandemic, but economists at the Leibniz Centre for European Economic Research Mannheim (ZEW) argue that it is socially problematic because it mainly benefits wealthy households.

Source: www.ntv.de