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Locally supplied services boosting social welfare
Services offered by restaurants, bars and cafes are locally supplied. Even more importantly, the majority of
guests in restaurants cafes are “locals”: one rarely travels abroad just for a meal.
Low VAT rates may increase overall productivity and GDP, if people are induced to spend less time on do-it-
yourself activities and more time on their ordinary job. The Commission acknowledged that
“locally supplied
services (and restaurants) are industries where households have considerable scope for carrying out DIY (do-
it-yourself) and therefore the area where such a shift could thus take place”.
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When compiling its study for the
European Commission, Copenhagen
economics stated that
“there is a
convincing theoretical and empirical
argument for extending reduced VAT
rates (or other subsidies) to sectors
whose services are easily substituted for
do-it-yourself or underground work, e.g.
locally supplied services and some parts
of the hospitality sector”.
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Effects on prices
An impact on the price of the hospitality
services is also one of the many effects
VAT rate changes may bring. As outlined
before, the extra financial resources
resulting from a VAT rate reduction are
used in different ways in this highly
competitive sector.
In
France
, 1 year following the VAT reduction of 1 July 2009 for restaurant services, prices in the restaurant
sector were on an average by 0.92% lower, while the consumer price index for overall economy increased by
1,51%, allowing for a price effect of 2,39% for the consumers. After 2 years this effect further increased to 2,85%,
as prices in the overall economy were increasing faster than in the restaurant sector.
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Also in
Finland
, following the VAT reduction on restaurant services from 22 to 13% in June 2010, price
comparisons proved that the VAT decrease was followed by an average drop in consumer prices of about 4.1%
throughout the restaurant and catering industry. The price monitoring results show that the restaurants that
are members of the Finnish hospitality association MaRa, slashed their prices by an average of 5.7%. The 4.1%
reduction in the food service consumer prices translates on the grounds for price elasticity into a 4.2% rise in
demand for food services. A calculated immediate effect to the catering industry is an EUR 150 million growth
in total sales, which corresponds to 2,000 – 2,200 more jobs across the industry.
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Similarly, when VAT rate reductions are not fully appearing in the changes of the final prices, for the various
other reasons described above, VAT increases are often not completely passed on to consumers, but absorbed
by the enterprises, in order to remain price competitive. In this case the lack of passing on the burdens results
in less investments in quality and personnel, thus contributing to the loss of competitiveness of the hospitality
products in the global tourism market.
HOTREC - Report on the benefits of low VAT on job creation and competitiveness in the European Union
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