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17 August 2009
Click here to read the original article 17 August 2009 (pdf)
In a stark warning to all countries facing spiralling debt, Latvia, Lithuania, Estonia and Croatia are all now imposing further VAT increases to help shore up their faltering finances. They join other countries such as Ireland and Hungary forced into recent crisis VAT hikes, with a number Western countries seemingly certain to follow. This includes the UK, which may be looking at 20% VAT within the next two years.
Globally, more and more countries are looking at VAT to solve their fiscal problems, most notably the US where President Obama’s healthcare reform may be the spur to push through VAT implementation.
Failed Strategies
All three Baltic former Soviet states had undertaken extensive reforms in their financial systems. This included introducing various flat rate tax systems where income, corporate and VAT rates were simplified at similar levels, with limited tax bands. VAT was set at 18% in all three upon succession to the European Union. Coming on the back of hugely expansionary economic policies, these advanced fiscal systems were widely praised as the way forward for countries seeking to attract foreign investment. However, the current economic meltdown now seems certain to derail this strategy.
Faced with spiralling government debt and currency markets actively speculating on debt defaults, a number of states have been forced into VAT rises. Leading the charge at the end of 2008 was Latvia and Lithuania, raising their standard VAT rates by 3% and 2%, respectively. It has now become clear that these rises will not be sufficient. The Parliaments of both countries have now approved further rises of up to 23%. This will take both states perilously close to the 25% EU VAT limit.
Estonia last year resisted an increase, but has been forced into an emergency 2% increase from 1st July 2009 as its economic picture worsens. Croatia’s snap 1% increase from the start of this month came under hard pressure from the IMF and financial markets.
A warning for all of Europe
The Baltics will not be the last European country to face VAT increases. Ireland, another country suffering from a burst property bubble, has already increased its VAT by 0.5% to 21.5% in late 2008. Hungary, whose population is saddled with Euro mortgages which are becoming unsupportable with the sinking Forint, increased its VAT rate by a dramatic 5% to 25% on 1st July.
Poland has already denied rumours of a planned VAT increase to assist its financial position. In Germany, faced with an accelerating slow down in its much admired manufacturing export engine, the Chancellor, Angela Merkel, has had to quash proposals from within her government to raise VAT – although the upcoming election may have been an influence.
UK creeps towards VAT increase
In the UK three weeks ago, a Conservative UK think-tank, the CEBR is recommending a 20% VAT increase to help with the rocketing UK government debt – expected to hit GBP 120 billion in the next few years. This was picked up The Sunday Telegraph this weekend, which forced hasty denials from the Party hierarchy that such a plan was being considered. Since it was the Conservative Party that introduced VAT into the UK, and then increased it in the midst of a recession in the 1980’s and again in the 1990’s, this may be an implausible denial.
Richard Asquith is the head of international VAT at The TMF Group www.tmf-vat.com
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