VAT revenues decreased in January 2023 by over 21%. At the turn of the year, they changed strangely. It is questionable whether VAT returns were deliberately manipulated to artificially increase revenues in 2022. This requires an explanation. The Ministry of Finance should quickly publish data on VAT refunds.
The VAT revenue ratio in January fell to 7,2 % of GDP – basically as much as at the beginning of the year 2016. It means a come back to the starting point when the current government took power.
The forecast of VAT revenues for 2023 is completely unrealistic. To make this forecast happen, in each month – starting from February – VAT revenues would have to grow year-on-year by over 32%. It means a necessity to look for savings in the budget during the year. The government will have to make difficult choices: either payment of so called 14th pensions (benefits paid to seniors) or energy subsidies. Either 14th pensions or benefits for carers of disabled people.
According to the Ministry of Finance, in January 2023, the state budget revenues from VAT tumbled. Despite the inflation figure is almost 20% and GDP is still higher than a year ago, VAT revenues were lower by over 21% y/y. The difference is as much as minus 7 billion PLN. Such a huge decline cannot be explained by reduced VAT rates. Besides, the restoration of rates, as history shows, does not have to bring a symmetrical upward rebound in income. In addition, VAT fraudsters can take advantage of the moments of significant changes in tax rates, especially if it concerns, for example, fuels.
Manual control of VAT refunds?
The statistic on VAT receipts at the turn of the year was quite surprising. In December 2022, after the poor indicators from October and November, VAT data suddenly jumped up (an increase of as much as 18,6% y/y), and then – in January – it suddenly collapsed. There is a suspicion whether there was a manual steering of VAT refunds again, so as to improve the result of the previous year, and the results for 2022 looked better at the Prime Minister’s propaganda press conference at the national stadium.
Additionally, the ministry delayed the publication of data for December, significantly exceeding the fixed deadlines for publication. This increases the doubts. But even if we add up the December increase with the January decrease, the results of VAT are very poor. Reason? In total, in these two months there was a decrease of almost 8,5% y/y with GDP growth in Q4.
The increase in VAT revenues is caused by many factors. Good economic situation, GDP growth or inflation level play the role. How does it look in practice? A higher price of bread means a higher VAT per loaf of bread. It is not the mafia who pays, but an ordinary consumer. This is definitely not a sealing effect. Of course, revenues are also influenced by the effects of sealing the tax system. The increase in VAT revenues above that resulting from GDP growth and inflation can be roughly attributed to sealing effects.
When assessing the trends in VAT revenues, we cannot disregard inflation and GDP dynamics, unless we only want to achieve propaganda effect. Prime Minister Mateusz Morawiecki, at a conference at the national stadium, dazzled with the alleged huge effects of sealing this tax. On colorful slides, he showed huge VAT increases in billions of zlotys – these were enormous percentages. In this presentation, he showed that VAT revenues from 2016 to the end of 2023 increased by PLN 163 billion, i.e. by 132%.
Prime Minister’s misuse
The first misuse is the fact that the Prime Minister used the forecast for this year to calculate these huge amounts, and in the description he used the perfect tense: “increased”. There is no guarantee that this forecast will happen. Current data show that it is completely unrealistic, but more on that below.
The second misuse is attributing the entire change in VAT to sealing effects. This is in fact no longer a misuse, but a VAT lie, which I have already written about many times. When estimating the effects of sealing, we have to subtract the effects of GDP growth and the effects of inflation growth. This is a primer of tax analysis. Sealing effects can be calculated on the basis of the VAT gap or an analysis of VAT revenues in relation to GDP. Recent data from the European Commission show that the sealing effects calculated on the basis of the VAT gap are many times lower than the increase of 132 billion PLN as the Prime Minister presented. The sealing effects calculated on the basis of the VAT gap amount to 20-30 billion PLN at most. This is less than half of only three flagship programs of the government, i.e. 500+, 13th pension and 14th pension.
Using nominal values in the situation of galloping inflation is absurd squared. Example: in Turkey, the VAT dynamics is even better than in Poland, only until 2021 there was a VAT increase of 220% compared to 2015. Interestingly, Argentina had an even better result – a VAT increase of 340%. Does this mean that VAT frauds were eliminated there? No, VAT was simply growing because there was gigantic inflation. Recent increases in VAT revenues in Poland are almost exclusively caused by inflation. This is no sealing or government success. Unless the government considers galloping inflation as its “success”.
No one denies certain effects of sealing of the VAT tax system. But the greatest obstruction in noticing these successes is the Prime Minister’s inventive fantasy, blunt government propaganda, and even VAT lies, which, contrary to logic and facts, try to multiply these effects to sky-high proportions.
Unfortunately, the current VAT data related to nominal GDP show very dangerous trends. This relation has been declining sharply since the beginning of 2022. This drop is very rapid and it is difficult to explain it by a temporary reduction in some VAT rates.
Taking market forecasts for GDP in Q1, it can be estimated that the ratio of VAT revenues to GDP in January fell to 7,2%. This is almost the same as at the beginning of 2016. Poor outcome in January may be the result of the recession. In recession, the VAT gap increases. More and more companies do not fully meet their tax obligations. This may result from objective factors, such as: bankruptcies, payment backlogs or legal tax optimization. But it can also be the result of the growth of the grey market and criminal activity. Situations when VAT rates are changed opens an opportunity for easy illegal income. The question is whether the government did not lose three times on the so-called anti-inflation shield? Why? First, he had a standard shortfall in income. Secondly, it created an opportunity for speculative earnings and criminal activities when VAT rates were being changed. And thirdly, it failed miserably in protecting households from galloping inflation.
Unrealistic forecast for 2023
The poor data for January shows yet another problem. The forecast of VAT revenues included in the budget for 2023 is completely unrealistic. From February we would have to observe a rapid increase of income. In each month of this year – starting from February – VAT revenues would have to be higher by nearly 32% year on year. This means that the VAT budget may be missing 10-20 billion PLN – in the extreme scenario it may even be 30 billion PLN. Effect? Looking for savings in the budget during the year. The government will have to make difficult choices: either pensions or energy subsidies. Either 14th pension or benefits for carers of disabled people.