IfW: Inflation harms not only consumers but also the state

Rapidly accelerating inflation is costly not only for consumers but also for the German state. “The end result is a deficit of about five billion euros,” said Jens Boysen-Hogrefe, a tax expert at the Institute for World Economy in Kiel (IfW).

True is that the increase in prices provided the state with higher revenues from value added tax, but “at the same time the state had to pay higher prices”, explained the expert, who is a member of the working group on tax assessments at the Federal Ministry

“In terms of consumption and investment, high inflation has actually hurt the country as a whole,” said Boysen-Hogrefe. For example, federal, provincial and local governments spend about $ 50 billion a year on road and building construction, but construction prices have risen sharply. EUR 3 billion compared to more normal inflation

N The negative consequences are even greater for government consumption: the authorities and ministries spend a lot of money every year – on new office equipment, electricity costs and office heating to petrol for company cars. And in this case you have to pay more because of high inflation. “This has led to additional costs of around € 7 billion,” Boysen-Hogrefe estimates.

“In case of import inflation, the state can only lose”

However, this is also offset by higher VAT revenues, as they automatically increase with rising consumer prices. However, according to the researcher, these additional revenues are likely to amount to only about 700 million euros. In the case of private investment in construction, higher prices are likely to have put almost 2.5 billion euros more into the state treasury. However, these additional revenues of around EUR 3 billion are offset by higher expenditures of around EUR 8 billion, which means that the state ultimately has less money.

Boysen-Hogrefe bases his calculations on this year’s average private inflation rate of around three percent and compares it with the European Central Bank’s (ECB) target of 2%. In this way, he deducts the special effect of the VAT increase. The adjusted inflation rate is 2.3%. “The state can only lose from import inflation,” said Boysen-Hogrefe, referring to the development of oil, gas and other imported goods prices, which have become particularly expensive in 2021

. In the case of domestic inflation, the increase in taxes on profits and wages, as well as on social security contributions, is likely to compensate for everything else. “The state always has good cards when wages rise sharply,” said the expert. Then there is the increase in income from contributions that are related to the development of salaries – for example, for pension insurance, health care, sick leave and unemployment insurance, “he said.