VAT to rise to 19% in Germany

Germany plans to increase VAT from 16% to 19% as part of a wider tax set of tax increases that aim to bring the big budget deficit under control.

The new VAT rate would come into force from January 2007.

Economists have gathered round to criticise the tax, arguing that it will hit German consumers just at a time when consumers they begun to spend again after years of retrenchment.

They add that it could also come at a time when exporters will be struggling with a euro that is expected to climb against the dollar.

However, a strong euro will also make dollar-denominated imports cheaper, so may offset the VAT increase for certain imports.

Moreover, the government needs to find ways to close the budget deficit gap on a sustainable basis. On the face of it, with 5 million unemployed, an increase in VAT is better than a rise in payroll taxes.