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

• Author: Adam Smietanka - Mikhail Bonch-Osmolovskiy - Grzegorz Poniatowski
• Pages: 74-77

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

period.

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.