Background: economic and policy context in 2018

• Author: Adam Smietanka - Mikhail Bonch-Osmolovskiy - Grzegorz Poniatowski
• Pages: 11-16

VAT Gap in the EU-28 Member States

page 11 of 99

analysis. Annex B provides statistical data and a set of comparative tables, whereas Annex C

provides additional graphs.

1. Background: Economic and Policy Context in 2018

a. Economic Conditions in the EU during 2018

In 2018, most EU MS saw a moderate decrease in the pace of GDP growth. Overall, growth

of the EU economy fell from 2.5 percent in 2017 down to 2.0 percent in 2018 in real terms.

Positive economic tailwinds provided particularly good conditions for an increase in VAT

collections in Ireland (GDP growth of 8.2 percent), Poland (5.3 percent), and Hungary (5.1

percent). The lowest GDP growth rates were observed in Italy (0.8 percent) and the United

Kingdom (1.5 percent).

In nominal terms, GDP increased by 3.3 percent and consumer prices by 1.9 percent. Final

consumption, which is the core of the VAT base (68 percent of the VTTL in 2018), increased

by 3.1 percent in total. Investment in gross fixed capital formation (GFCF, which made up 14

percent of the VTTL in 2018) increased by 4.2 percentage points for the entire EU.

The change in GFCF was volatile across countries and varied from -18.7 percent in Ireland to

24.4 percent in Hungary. Due to the volatility and frequent revisions of GFCF figures by

Statistical Offices, GFCF is the main source of VAT Gap revisions. Whenever new information

on the actual investment figures of exempt sectors becomes available, the estimates of VAT

Gap are revised backwards.

General government budgets and the labour markets remained relatively sound. The average

general government balance amounted to -0.7 percent with half of EU MS observing a nominal

surplus. The unemployment rate fell in nearly all EU MS and by -0.9 percent on average.