Lower VAT is not a panacea

The government received reports from experts regarding lowering the VAT on electricity.

 

It would create jobs but not as many as expected.

 

It would also take a toll on public funds.

 

The federal government may still not do it.

The federal government and the regional executives will work on the sensitive issue of lowering the VAT on electricity. The idea is to reduce the rate to 6% compared to the current rate of 21% to help restart the economy.

 

The discussion began during the summer but differences came up within the majority. The CD&V in particular made its reservations known.

 

The government requested a report from experts from the National Bank, the Planning Bureau, Eurostat and other organizations as the basis for an objective debate. We were able to learn what was in this report. It’s true that this measure is not a panacea.

 

According to the experts, though, it does present some advantages. First, of course, household energy bills would be lowered. The document states, “If the VAT on electricity is fully reflected in consumer prices, the price of electricity will be reduced by 12.4%.”  It also reveals that the measure would increase low income earners’ purchasing power. It would also encourage consumption and enterprise investment.

 

Another plus: new jobs would be created. However, the impact would be more limited than first thought. The government was counting on 10,000 new jobs. The report, however, has cooled expectations. “Employment would increase by over 1,000 in 2014 and by approximately 8,000 in the medium term.”

 

The report also confirmed a positive effect on governments: lower electricity prices would delay the threshold index trigger. This means that raises in salaries based on automatic indexing would be delayed. “The price index would be reduced by 0.39% while the health index (NDLR used for salaries) will be 0.42%.”

 

That is the extent of the positive points for the public authorities. The experts also point out the pitfalls. “The public deficit will grow due to this measure,” state the experts, pointing to a maximum deterioration of 0.14% of internal GDP over the 2015-2018 period. At current GDP levels, that represents a 518 million EUR cost to the budget. That’s not all. The public debt would also be affected. “It would grow by about 0.57% of GDP in the medium term.” Since we’re aware of the effort currently being made to reducing the debt to less than 100% of GDP, the importance of this counter-argument is significant.

 

And that’s not all. The experts also mention an ecological issue. The reduction of the price of electricity will lead to higher consumption and greater economic activity. As a consequence, CO2 emissions will rise. “The increase of emissions would be about 0.11% in the short term (increase by 130,000 tons of CO2 equivalent) and 0.62% in the medium term (increase of over 700,000 metric tons).”

 

Although this report was intended to clarify the options, the study favors neither the supporters of a decreased VAT, headed up by the SP.A, nor its detractors, found in the CD&V. The discussion then runs the risk of being picked up where its supporters left it.

 

The report also analyzed another draft measure: the famous free economic zones. The idea is to give tax breaks to companies that invest in the regions where mass layoffs have occurred or where youth unemployment is very high. The experts are finding obstacles to this idea as well. Its supporters in Koen Geens’ ministry of finance pointed to the fact that the measure is in compliance with European law. Europe does place some limits, however. The federal government’s ambition was to allow all the cumulative federal and aid programs to be enacted. The experts though don’t think that the cumulative aids can be unlimited. “If the federal government decides to reduce labor costs, it will also reduce the possibility for the regions to allocate investment aid.”  Specialists highlight the dangers of inequality. If the criteria for the targeted aid if youth unemployment, the aid will first go to Wallonia and Brussels. If the criterion is youth unemployment since the beginning of the crisis, Flanders will be the beneficiary.

 

Now armed with this detailed report, the governments must decide. It won’t be easy.

BERNARD DEMONTY

 

 

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