The potential impact of the coronavirus recession on the evolution of the VAT GAP

AuthorAdam Smietanka - Mikhail Bonch-Osmolovskiy - Grzegorz Poniatowski
VAT Gap in the EU-28 Member States
page 74 of 99
6. The Potential Impact of the Coronavirus Recession on the
Evolution of the VAT Gap
In this chapter, we examine the potential impact of the coronavirus recession on future VAT
collections. The objective is to illustrate that both a decrease in the base as well as an
increase in VAT non-compliance will negatively affect VAT revenue over the 2020-21
To conduct our forecasts, we operationalise the numerical evidence from the econometric
analysis presented in the preceding chapter. We use the coefficients of the interrelations
between the VAT Gap and the macroeconomic indicators in the baseline model
specification and the Spring Commission’s macroeconomic forecasts as inputs. The
predictions are based on the number of assumptions. Not only do we assume that the
macroeconomic forecasts will be accurate, but we also assume that the control variables
unrelated to the economic situation will not change. For this reason, prediction intervals are
relatively large. The results for the EU are reported in the previous section, whereas the
indicative results for each EU MS are shown in Annex C.
The ongoing COVID-19 recession that will be covered by future VAT Gap Studies is rapidly
changing the conditions for collecting VAT, which have remained favourable in recent years.
Due to the pandemic, in May 2020, the European Commission significantly revised its
forecast of the main economic indicators16. It was estimated that the EU’s GDP as a whole
could contract by 7.4 percent in 2020 and grow by 6.1 percent in 2021 if the following
scenario materialises:
a) the number of infections in the EU will remain under control even after the loosening
of containment measures,
b) most of the lockdown measures will be gradually lifted and economic activity will not
be affected greatly by the measures that will be kept in place, and
c) economic policies put in place by MS governments and the EU will prove to be
effective in preventing high unemployment and mass bankruptcies.
As shown in Figure 6.1, the estimates point to a rapid decline in GDP growth and a
deterioration of general government balances in 2020. As a result of the recession, the VAT
Gap in 2020 is forecasted to increase by 4.1 percentage points up to 13.7 percent (Figure
6.2 and 6.3). The hike in 2020 could be more pronounced than the gradual decrease of the
Gap over the three preceding years. This means that the VAT Gap, as a percent of the
VTTL, will be higher than in 2016 (Figure 6.3). In nominal terms, the VAT Gap is expected
to reach over EUR 164 billion in 2020. A relatively smaller increase of the nominal VAT Gap
16 At the moment of publication of this Study, more up to date (interim) Summer Forecasts became
available. However, as they did not include projections of government balances necessary for
our projections, they were not included herein.

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