Millions of Europeans are employed in the tourism and hospitality sectors, and they will need continuous, targeted support to recover and revive their industry, which has been among the hardest hit by the COVID crisis.
Lockdown restrictions did not just create large-scale unemployment by closing millions of hospitality businesses. They also meant that governments lost out on enormous sums in tax revenue: in Europe, the hospitality sector normally contributes more than €125 billion annually to government treasuries in excise duties, VAT and other taxes.
Politicians will be eager to ensure that treasuries benefit from the reopening of hospitality and socialising venues. However, they must balance the need to generate revenues with the need to ensure that businesses in these sectors can flourish and self-sustain in the immediate post-COVID period. Premature additional tax burdens might do the opposite, and delay the recovery by acting as a drag to job creation and financial health of the sector.
As governments plan for a successful reopening and full recovery, they need to think creatively about how they can give ailing hospitality businesses a boost, while also bringing excise and VAT policies into the 21st century.
VAT reductions have worked
A recent study in Germany showed that temporary reductions in VAT relieved financial pressure on households in every income bracket.
To cope with the blow from COVID, some countries such as the UK and Ireland have offered VAT reductions to the hospitality sector. Belgium, for example, brought in a reduced rate of VAT for the restaurant sector and catering services in June 2020, which provided a strong boost to sectors that were particularly hard-hit by the lockdown restrictions.
Policies such as these need to be maintained and extended to help the sector at a time when cash reserves have been badly depleted, and businesses just started to break even. With hesitant consumer confidence and premises operating below capacity due to lingering restrictions, targeted stimuli are still required.
But in order to ensure that the revival of hospitality happens quickly, we need to go beyond this and examine more far-reaching policy changes, particularly when it comes to excise.
Tax troubles and possible remedies
The hospitality sector has also long struggled with outdated rules when it comes to how alcohol is taxed, rules which already hindered the sector pre-COVID, but which are a much heavier burden at a time when we are trying to help bars and restaurants to reopen successfully.
To encourage people to get out, socialize, support their local economies and accelerate the recovery, we need a new approach.
Governments need to consider steps such as extending the freezes in excise duties which have been introduced in some jurisdictions, while also equalising how different products are taxed.
For example, huge discrimination exists against spirits in most European taxation systems. Spirits products contribute more than twice as much as their ‘fair share’ in excise according to relative volumes consumed versus wine and beer.
This inefficient fiscality means that customers pay very differently for products in their choice portfolio, it also has a detrimental impact on related industries.
A glaring disparity like this which blatantly contradicts public health science creates perverse incentives which damages the hospitality sector (which is disproportionately reliant on the spirits trade given that these products are more valuable for hospitality venues) and Europe’s many craft distilleries, who are also struggling because of the hit to tourism.
The Institute for Fiscal Studies recommends that all alcohol should be taxed at an equivalent rate per unit, unless compelling evidence can be found to justify treating comparable products in radically different ways.
The public health bodies share this view. In a 2020 report on alcohol pricing, the World Health Organization (WHO) stated that “there is little justification for any approach other than specific taxation, through which the tax payable on a product is directly proportional to its alcoholic content,” before going on to argue that “[t]ax rates should generally be similar for different types of alcohol (e.g. beer, wine and spirits).”
Despite some alarmist headlines at the beginning of the pandemic flagging increasing alcohol sales in grocery stores, overall alcohol consumption in 2020 was substantially down almost everywhere compared to 2019. Interestingly, volumes of spirits consumed often increased, indicating that consumers switch between beer, wine, cider or spirits. Current taxation puts a lid on these natural consumer choices because spirits are over-taxed compared to beer and wine in every Member State of EU27.
As economic activity resumes and normal life is restored, the tax burden on hospitality needs a radical rethink.