News | Sunday, 29 November 2009

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French VAT woes prove Maltese decision right

Matthew Vella
The Maltese government’s decision not to cut VAT on restaurant meals may have been wiser than many would have expected, after France now stands to lose €2.4 billion in revenue in a full fiscal year from cutting VAT from 19.6% down to 5.5%.
French President Nicolas Sarkozy’s decision to cut VAT for 185,000 restaurants, bars and cafés was supposed to reduce prices, raise staff wages and create 40,000 jobs – and yet, the Financial Times reported, none of those has yet materialised.
The Maltese government was also asked by the Malta Hotels and Restaurants Association to take advantage of the allowance from the EU to cut its VAT rate.
Finance Minister Tonio Fenech was the first to express scepticism on the benefits from the tax cut. The minister later responded with a 40-page report that claimed the country would lose €29 million in 2010 and €23 million in 2011. Moreover, lowering the VAT rate would not affect the industry as tourists attached more importance to the cost of the flight and the hotel.
In France, the price of an ordinary Parisian dish of the day such as a steak-frites or pavé de saumon should have dropped from about €15 to €13.20. In the end, prices fell by only 1.46% in the four months following the introduction of the cut in July, although restaurant lobby groups argued the tax cut helped save businesses threatened by the recession.
The fiscal cut served as a big publicity coup for Sarkozy and finance minister Christine Lagarde. Sarkozy secured agreement from the European Union after Germany lifted a seven-year veto against the pledge, originally made to the restaurant industry by President Chirac.
But earlier this week, the finance committee of the French Senate unanimously voted to reverse the VAT cut. “We didn’t get our money’s worth,” said Philippe Marini, a senator for Sarkozy’s UMP. But the amendment was later overturned by the full Senate.
Sarkozy said he would “never” reverse the VAT cut, describing restaurant-owners as “people who work extremely hard and never ask for anything”.
The OECD said that France’s “distortionary” VAT cut would increase its structural deficit, citing the deterioration of public finances having contributed to the failure of the tax cut.

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