German VAT reduction on gas opposite of what is needed, economists say

The newly announced VAT reduction on natural gas in Germany, to come into effect from October to help consumers facing high gas prices, has elicited a lot of criticism from economists. The scheme is “expensive, not targeted and relieves people with low incomes far too little,” economist Marcel Fratzscher, president of the DIW economic research institute, said on Twitter. He argued direct transfer payments would be much better to help lower income households. “Incentives to save gas will be reduced” too, tweeted Jens Südekum, member of the Scientific Advisory Council of the economy ministry, “so exactly the opposite of what is actually needed right now is achieved,” he said according to news website n-tv. Other economists voiced similar concerns. “Hopefully, people don’t think now that gas won’t be so expensive after all,” economist Veronika Grimm, member of the government's economic advisory council, tweeted.

The government has planned to temporarily reduce the VAT on gas from 19 to 7 percent, in hopes of somewhat relieving the high costs for struggling customers. Chancellor Olaf Scholz said the introduction of such a measure will “create relief for customers that is much greater than the additional burden caused by the gas levy.” The levy meant to stabilise struggling gas importers was announced earlier this week to be set at 2.4 percent, sparking concerns of fuelling inflation.