IfW calculations: inflation costs the state billions

As of: 12/29/2021 1:09 p.m.

The “inflation shock” is not only felt by consumers in their wallets. The German state is also suffering. He has to pay significantly more to build roads and buildings.

According to the Bundesbank, inflation is likely to have risen by 3.2 percent this year. The rapidly increasing rate of price increases not only for consumers, but also for the public sector. The German state has to cope with additional billions in costs. “The bottom line is a minus of around five billion euros,” said today the tax expert at the Kiel Institute for the World Economy (IfW), Jens Boysen-Hogrefe.

Higher costs for construction investments and office operations

It is true that the high inflation gives the state more revenue from VAT. On the other hand, he himself has to pay higher prices for building investments and running the offices of authorities and ministries. “In terms of consumption and investment, the strong inflation actually hurt the state overall,” believes IfW expert Boysen-Hogrefe.

The high rate of inflation leads to 1.3 billion euros in additional costs for the construction of roads and buildings. The federal, state and local governments invest around 50 billion euros here every year.

The state feels the high inflation most in the operation of the authorities and ministries. IfW researcher Boysen-Hogrefe estimates that around seven billion euros more had to be spent on new office equipment, electricity and heating costs as well as fuel for company vehicles.

Only 700 million euros more in VAT income

On the other hand, there are higher revenues from VAT, as these increase automatically with the rise in consumer prices. Boysen-Hogrefe estimates that this additional income should amount to around 700 million euros. The higher prices for private construction investments are likely to have washed a further 2.5 billion euros into the coffers of the state.

The IfW expert used the expected average rate of price increase in private consumption of around three percent for this year as the basis for his calculations. He compared this with the European Central Bank’s (ECB) target of two percent. Boysen-Hogrefe also deducted the special effect from the renewed increase in VAT. This leaves an adjusted inflation rate of 2.3 percent.

Consumers suffer most from inflation

However, the biggest sufferers from the soaring inflation are consumers. They had to pay significantly more money for fuel at the pump, heating and electricity at home and groceries. And there will hardly be any relief in 2022 either. The Bundesbank expects inflation to rise to 3.6 percent. According to a study by the Institut der deutschen Wirtschaft, poorer households and pensioners bear the brunt of inflation.


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