Restaurant Industry's Predicaments Dismissed by Researchers
The turmoil in the restaurant industry, struggling to recover from the pandemic, is once more stirring controversy. The issue at hand is the anticipated return of the regular VAT rate, which businesses feel threatens their existence. However, industry concerns fail to hold up under rigorous scrutiny by experts in the field.
The restaurant sector has endured significant setbacks, with approximately 25,000 establishments shutting their doors for good over the past two years—a devastating consequence of the pandemic. Despite governments offering aid like grants, loans, short-time work benefits, and reducing VAT on food from 19% to 7%, the Federal Statistical Office unveils that inflation-adjusted sales in the catering industry remain 12% below the pre-crisis level of 2019 as of the first half of 2023.
Nevertheless, studies conducted by the IFO Institute reveal a different narrative. Although the entire industry has yet to recover, high-ranking cities have already surpassed their pre-corona levels, with their sales and circumstances shifting to suburban areas and weekends due to the rise in remote working.
Rising Prices in the Restaurant Industry
The restaurant sector has exhibited a trend towards increasing prices, trumping the market overall. Economists cite these price hikes as evidence of restaurants managing to absorb and pass on aspects of their increased costs, such as staff, food, and energy expenses, without incurring a loss of guests.
According to the Federal Statistical Office, food costs in restaurants are currently 20% higher than in early 2021, whereas compared to February 2022 (the onset of the Russian invasion in Ukraine), the price differential escalates to 14%. It appears that the comparatively high price increases have left the sector with "a certain margin leeway" according to the Leibniz Centre for European Economic Research Mannheim (ZEW).
The average return on sales dipped down to 3.9% for the sector in 2021, according to the DEHOGA. The ZEW researchers posit that proactive restaurateurs raised their prices because they had previously anticipated the reinstatement of the VAT rate, lacking substantiation for a forthcoming price shock.
The Rise in VAT: Impact and Debate
If the return to the 19% VAT rate was to be entirely passed on to restaurant customers, as economists forecast—prices for dishes like pasta would spike by roughly 11% and average prices could skyrocket by approximately 10%. Economist Marcel Fratzscher estimates approximately 10% price increase, with around 70-80% of the VAT increase being ultimately passed on to customers.
Though the exact extent of the pricing shift remains unclear, the ZEW researchers decline to establish the implications for industry turnover and business closures. DEHOGA forecasts the loss of 12,000 businesses as a result. The uncertainty hinges on the degree to which restaurateurs factored the VAT increase into their pricing calculations thus far.
The Economist's Stance on VAT Reductions
Despite the massive losses incurred by the food service industry, economists argue that a permanent reduction in VAT is not justified. They view the tax subsidy as a spending burden totaling 3 billion euros annually, which could escalate to 38 billion euros over the next decade if extended indefinitely.
The increasing number of rural areas with a dearth of recovery, owing to lower income levels, must also be considered. As the DEHOGA cites, average restaurant visits increase with household income, meaning wealthier families benefit more from the VAT reduction. Fairer relief for school meals and kindergarten meals seemingly aligns with the economists' stance, as it equally benefits both groups of families.
Controversies Surrounding the VAT Reduction
Lowered VAT rates are the norm in many European Union nations; however, ZEW researchers reject the notion that German businesses are disadvantaged due to their localized services, arguing that a peculiar set of factors and conditions peculiar to each locality play a role.
Other arguments for the reduction, such as inflation, labor shortages, and cultural significance of restaurants, fail to convince the ZEW economists. They stress that the costly tax concessions present social disparities, with wealthy households reaping the largest benefits from the VAT cut.
In conclusion, experts reviewing the German restaurant industry's plight measured against a reinstated VAT rate find many of the industry's concerns unfounded. It emerges that several factors, such as increased costs, shifting consumer preferences, and changing lifestyles, contribute to the overall situation—rather than governmental interference in the form of VAT rate reductions.
