The Slovenia Times

Central Bank Expects Limited Impact of VAT Rise on Prices


Based on experiences of countries that have resorted to VAT rises, Banka Slovenije has made projections of what the impact on inflation would be if the basic VAT rate in Slovenia was raised by 2 percentage points as of July.

The impact of a VAT rise on consumer prices is hard to assess, but experiences from countries such as Hungary, Greece and the UK show the transfer into inflation is between 60% and 100%, according to the central bank's Macroeconomic Trends and Projections report.

The effect on prices also depends on the timing; a VAT rise can more easily be transferred into final prices in January when many companies change prices. But at a time of falling household consumption, a VAT rise is unlikely to be transferred fully into consumer prices, central bank analysts maintain.

Their projections of the impact of a 2-percentage point increase in the basic VAT rate (20%), without a change in the reduced rate (8.5%) only show a direct impact on prices (just over 50% of products in the basket of goods are taxed at the basic VAT rate), without the potential effect on other macroeconomic aggregates.

Under the low transfer scenario, the 2-percentage point VAT increase would be transferred 45% into the prices of tobacco, tobacco products and alcoholic beverages and under the high impact scenario, the transfer would be 90%. The transfer into prices of energy products would be 80% and 90%, respectively.

In case of other goods, VAT rise would translate into prices in the amount of 25% and 50%, respectively, and in the case of services in the amount of 30% and 60% under respective of the above two scenarios, while a third scenario is that the VAT rise would be transferred fully into final prices.

The central bank projects inflation at the annual rate of 2.3% for this year, 1.4% next year and at 1.6% in 2015. The bulk of the initial impact of the VAT rise would be felt in the first year.

Under the low transfer scenario, the impact on inflation this and next year would be 0.2 percentage points. Under the high transfer scenario, inflation would be raised by 0.3 percentage points, and under the full transfer scenario higher VAT would boost inflation by 0.5 percentage points.

Meanwhile, inflation projections for 2015 remain unchanged under all three scenarios as the impact of a higher VAT would no longer matter.

After 20 EU countries raised VAT, the average rate in the bloc is currently 21.2%, up 1.7 percentage points since the start of the crisis.

The lowest rate is set by the European Commission at 15% and is currently used only in Luxembourg. The highest rate is not set but is not supposed to exceed 25%. Hungary raised VAT to 27% in 2012.


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