Many restaurants are still suffering from the consequences of the pandemic. By returning to the regular VAT rate, they once again see their existence threatened. However, the industry’s arguments do not stand up to scientific scrutiny.
The catering industry is predicting a mass death of businesses and a price shock for guests. The next dispute within the traffic light coalition is in full swing. Because the reduced VAT in the industry ends at the turn of the year. Prime Minister Manuela Schwesig wants to prevent this in the Federal Council, citing the high energy and food prices that restaurateurs are suffering from. However, scientific studies do not confirm the horror scenario predicted. According to economists, at least parts of the catering industry are doing better than claimed. They consider further subsidies to be unfair.
The industry was one of the biggest losers from the corona pandemic; around 25,000 companies had to close permanently in the two years. Despite government aid such as subsidies and loans, short-time working benefits and, last but not least, the reduction in VAT on food from 19 to 7 percent. According to the Federal Statistical Office, in the first half of 2023, sales in the catering industry, adjusted for inflation, were still twelve percent below the pre-crisis level of 2019. However, restaurants in large cities have become one Study by the IFO Institute According to them, their sales have already recovered and their sales, adjusted for prices, are above the pre-Corona level. In the cities examined: Berlin, Munich, Hamburg, Stuttgart and Dresden, part of the sales shifted to the suburbs and to the weekend, which the researchers attribute to the spread of home offices.
Restaurateurs are raising prices significantly
In addition, the industry overall increased its prices more than the economy as a whole – despite the reduced VAT. “The companies have managed to pass on some of their increased costs for staff, food and energy without the 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 Ukraine war began, it is a good 14 percent more.
After Assessment by researchers at the Leibniz Center for European Economic Research Mannheim (ZEW) The comparatively high price increases are likely to have created “a certain amount of leeway in the margins, at least for part of the industry”. In their eyes, 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 ZEW study authors assume that forward-looking restaurateurs increased their prices so much because they had already taken into account that VAT would rise again for them – as basically announced. Therefore, the expectation of a price shock with full passing on of the normalized VAT to customers is not plausible, the economists write. The reduction during the pandemic was extended until the end of this year due to the energy crisis. However, in the 2021 election campaign, Chancellor Olaf Scholz promised: “We’ll never get rid of that again.”
1.70 euros more for a plate of pasta?
If the return to 19 percent VAT were now passed on in full to restaurant visitors, a pasta dish that currently costs 15 euros, for example, would soon cost 16.68 euros. Current prices could rise by 11.2 percent. DIW economist Marcel Fratzscher expects a price increase of around ten percent: “Of the twelve percentage points that VAT is now increasing in the catering industry, 70 to 80 percent will probably 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 sales and the number of companies could fall as a result. This is how co-author Daniela Steinbrenner explains it in an interview with ntv.de. DEHOGA has predicted the closure of 12,000 companies. Steinbrenner says: “An accurate assessment 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 believe that a permanently lower VAT is justified. It is a “tax subsidy that currently results in annual tax losses of a good three billion euros,” explain the corporate taxation experts. “If there were a permanent extension, these costs would continuously increase with the industry’s nominal sales growth. For the next decade, total costs of around 38 billion euros would be expected, which would have to be counter-financed by higher taxes elsewhere or spending cuts.”
VAT reduction benefits the wealthy
In rural areas, the catering industry is sometimes much worse off than in the big cities. Since overall industry sales are still below the pre-Corona level, but above in the metropolises with strong purchasing power, numerous restaurants continue to have to struggle. “Parts of rural areas outside the metropolitan regions have not recovered,” says IFO study author Carla Krolage to ntv.de.
But in the eyes of economists, such as economists Monika Schnitzer and Fratzscher, the justification for a lower VAT has disappeared with the end of the pandemic. The structural change in the industry should not be accompanied by permanent subsidies. ZEW division manager Friedrich Heinemann calls the “campaign of the 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 when it comes to catering in schools and kindergartens. There, poorer parents are supported just as much as richer ones by a lower VAT.
“The disappearance of village pubs is a long-term trend”
In most EU member states there is a reduced VAT rate in the catering industry. However, the ZEW economists do not see German companies at a disadvantage because they offer their services locally. The scientists also do not accept other arguments for a reduction such as inflation, a shortage of skilled workers and restaurants as cultural assets.
The labor shortage affects the entire German economy. “Subsidizing select industries would only shift the problems between sectors.” In addition, tax shortfalls in VAT would “increase the pressure for increases in other taxes such as income tax and would even further exacerbate the labor shortage due to the further reduction in incentives for performance.”
The researchers are also not convinced that a lower VAT could no longer save well-attended restaurants in inner cities and villages. “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.”
The accusation that the increase in VAT is fueling inflation, as CSU boss Markus Söder complains, is wrong according to economists. Chief economists at banks assume an effect of 0.1 to 0.2 percentage points on the inflation rate. But the ZEW researchers believe that combating rising prices through subsidies makes little sense from an overall economic point of view. 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 scientists explain. “Costly crisis measures” despite the end of the pandemic would ultimately be counterproductive to long-term price stability.