German VAT Cut Unleashed $39 Billion Spending Spree, Study Finds

(Bloomberg) --

Countries looking to perk up their economies when interest rates are already at rock bottom might learn something from Germany.

Last year’s surprise value-added tax cut by the government in Berlin unleashed about 34 billion euros ($39.4 billion) of household spending while only resulting in about 7 billion euros of lost budget revenue, a working paper published by the National Bureau of Economic Research found.

The six-month measure, enacted with benchmark borrowing costs in the euro area below zero for years, encouraged Germans to splurge in particular on durable items like cars, furniture and appliances, according to the study’s authors, led by Ruediger Bachmann. The step contrasts with pandemic-support policies elsewhere, with the U.S. -- for example -- sending stimulus checks to its citizens.

“The unexpected, temporary VAT cut in Germany in the second half of 2020 worked as a measure of unconventional fiscal policy,” the researchers said. “We find that Germans substantially increased their consumption expenditures, especially on durable goods.”

The study sought to isolate the spending impact of the tax reduction, as opposed to other support measures, by looking at how informed consumers were about its temporary nature. People who were aware it would be phased out were more likely to purchase big-ticket items, the authors found.

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