If past trends are any indicator, the economy and VAT in the EU will take a serious tumble. Global markets ignored the initial outbreak from China, but as the Coronavirus begins to spread to other countries, markets have responded with sharp falls. As of the writing of this article, there are over 300 cases in Italy and 80 cases in the United Kingdom. Just recently, the Organisation for Economic Development (OECD) stated that developed nations have to take serious measures or the world will head to another recession, the first since 2008.
How did the world react to past epidemics?
To understand the direction of the global economy in the next few years (because the Coronavirus is not going anywhere), we need to take a look at how the world economy responded to past global epidemics.
History shows that when there is an epidemic, the following areas are affected: health, agriculture, trade, tourism and travel. When there is an epidemic, health resources are always under strain. For example, during the H1N1 outbreak, it cost around £45.3 million to care for patients. The high cost of healthcare is due to the need for both short and long-term care. Short-term care is needed to alleviate immediate symptoms and a long-term cure to find a solution to the virus itself. Long-term care can be particularly costly because there is a need to cure the virus and curb its spread.
When there is an outbreak, it hurts the economy in several ways – worker absenteeism hurts productivity, businesses have to close, and schools have to be shut down. Moreover, people are less inclined to go out to pubs and restaurants. Hence, we see a situation where government expenses grow to massive levels because they need to care for the sick when revenue derived from VAT in the EU is on the decline.
While government expenses increase significantly due to the need for healthcare, their revenue making avenues also decrease. Tourism and travel shutdown when there is an epidemic. Having fewer tourists visit a country significantly affects local businesses like restaurants, cafes and local attractions. These losses are even more keenly felt when they occur during the tourist season. For example, when SARS was the global epidemic of concern, it cost China over $3.5 billion in lost tourism. We are already seeing the adverse effects of the Coronavirus on EU tourism because it costs the industry over €1 billion a month, which has a significant impact on VAT in the EU. By contrast, travel and tourism increase when the epidemic is no longer a problem.
Since viral outbreaks discourage travel, they also hurt trade. Most of the epidemics emerge via zoonoses which hurts agriculture and trade. In such cases, governments are forced to utilise measures that cause trade and agriculture to regress. For example, when there were numerous cases of BSE from 1996 to 2002, the UK government was forced to use various containment measures, including the slaughter of animals, accumulating losses of over £3.4 billion. This had a regressive effect on VAT in the EU because people were not going to buy agricultural or meat products associated with the viral outbreak.
VAT in EU and the Coronavirus
VAT in the EU is an indirect tax implemented across different stages of the production process, so when there is a global epidemic, both businesses and citizens have a hard time meeting their tax obligations. This forces governments to reduce VAT and increase austerity spending. China has already cut its VAT rates, and Nigeria is considering putting its VAT system on hold because of the viral outbreak. Furthermore, most governments are considering austerity measures in response to the global epidemic, which is sure to increase expenditure. A situation where expenditure increases, amidst declining revenue, is less than ideal for the government.
It’s safe to say that government spending is going to increase as the viral outbreak gets worse. When one compares the current response to the Coronavirus, against past global outbreaks, there are certain parallels. We are seeing health resources being strained, travel strictly quarantined and tourism taking a huge hit. All these signs indicate that we are fast leading to a recession and a decline in VAT in the EU.