Background: economic and policy context in 2018

AuthorAdam Smietanka - Mikhail Bonch-Osmolovskiy - Grzegorz Poniatowski
VAT Gap in the EU-28 Member States
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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.

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