“Bill, please!”
Discover how VAT reductions and government aid have impacted the German catering industry during the pandemic: The delicate balance of recovery, pricing strategies, and the looming return to regular VAT rates are examined. Dive into an analysis of what lies ahead in this critical period for restaurateurs and customers.?
Not so long ago, the pandemic meant that things weren’t exactly looking suitable for the catering industry in Germany: months of closures, resulting in staff lay-offs… restaurateurs were spared nothing. It was a real test for some, while others had to throw in the towel. Rien ne va plus. The restaurant clear-cut was soon reflected in the empty commercial properties in city centres — in cities such as Hamburg, Berlin and Munich, the closure of restaurants seemed to be on the agenda every week.???
But since we are in a Germany where we “live well and happily”, the catering industry has fallen relatively softly: Merkel’s government team has at least cushioned the immense losses with the corona aid that will soon be available.?
A tiny spark of hope flickered back on the horizon, and a genuine spirit of optimism spread. And when VAT was reduced from 19% to a mere 7% on 1 July 2020 to support the beleaguered hospitality industry further, the sector breathed a collective sigh of relief. After all, the reduced tax rate is set to remain in place until the end of 2023. But will the tax reduction also benefit paying customers? Where would we get there? After all, following the coronavirus drought, it was finally possible to make a healthy profit again, or even better, prices skyrocketed under the guise of inflation. Even if the price increases here and there become almost unbridled and the word “greed inflation” is bandied about, And now? The dream is over. Just under five weeks to go, and the reduced tax rate will evaporate. The outcry in the catering industry is enormous. Although the time limit was clearly communicated from the outset, it has been criticised from all sides. But let’s take a closer look: is the outcry from the restaurant industry justified?
Science versus industry claims?
Naturally, the catering industry paints a gloomy picture. There is even talk of business closures and price shocks, even if scientific studies tend to question these portrayals. Research by the IFO Institute and the Leibniz Centre for European Economic Research (ZEW), among others, shows that at least parts of the industry have recovered better than the public complaints suggest. These findings shed new light on the calls for ever more state subsidies, especially given the current situation in which the German government has even ordered a budget freeze. The insightful ZEW brief report “The reduced VAT rate in the catering industry” from 9 October 2023 analyses the current debate in detail and provides an initial conclusion on subsidy policy.?
Price dynamics and social inequality?
Paradoxically, many restaurants have increased their prices, in some cases massively, despite the temporary reduction in VAT. This clearly shows that the businesses have managed to pass on a large proportion of the increased costs to their customers. The ZEW researchers criticise the call for a permanent reduction in VAT and point to the social inequality that is exacerbated by such measures. The VAT reduction favours wealthier households in particular, while fair relief would be more likely to be seen in catering in schools and kindergartens.?
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The following chart shows the price trend for meals in (fast food) restaurants 2020-2023 in Germany
A differentiated view is required?
Sure, who is happy to give up a reduced VAT rate voluntarily? But let’s face it: the situation in the catering industry has recovered significantly since 2020, often better than is being portrayed. In addition, prices have been tightened considerably — and the paying guests have gone along with this so far. It is therefore rightly feared that further price increases will lead to a drop in sales. However, calling for additional subsidies seems somewhat unjustified, at least on the basis of the ZEW short expertise, which is current and dates from 2023. It is and remains essential that political decisions are based on sound scientific findings, not emotional or one-sided industry representations. Furthermore, there was never any talk of a permanent solution, so experts and the Federal Court of Justice are against a further extension.??
They justify this with the following three points in particular:??
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Even if high-ranking politicians — across party lines — from Manuela Schwesig (SPD) to Markus S?der (CSU) supposedly want to stand up for SMEs and try to prevent the return of the regular VAT rate, their chances are currently very slim. After all, the BVerfG announced its judgement on the supplementary budget for 2021 last week — just one day before an important budget session in the Bundestag. It concerns the debt brake and up to 60 billion euros in special funds that are now missing. The federal government, therefore, has even less room for manoeuvre and must generate revenue.?