German budget woes trigger disaster warnings for restaurants

Kemal Üres, owner of a tapas bar in Hamburg, has spent the past year telling his social media followers that thousands of businesses like his will be destroyed by a planned tax increase.

The man who calls himself the “Gastroflüsterer”, or restaurant whisperer, is campaigning to make the pandemic-era cut in value added tax on restaurant meals permanent. Otherwise, the German government’s decision to raise VAT from the 7 per cent rate in place since 2020 back up to 19 per cent in January would lead to higher prices, job cuts and as many as 30,000 bankruptcies, he said. Yet many economists, who support the increase, have dismissed such warnings as scaremongering.

Germany is less well known for its national cuisine than countries such as France or Italy. But two-thirds of Germans eat out at least once a month, surveys show, and the restaurant sector is a significant part of the country’s economy with about 130,000 companies employing 1.3mn full-time and part-time workers and generating about €50bn of annual sales.

But a constitutional court ruling in November against Berlin’s use of off-balance sheet funds had presented the government with a €60bn hole in its budget — and left Üres feeling hopeless. “They say they’ve no money for anything,” he said. “That was the final blow.”

To close its budget shortfall, the German government this month said it would cut €17bn of spending, ending subsidies in areas from electric vehicles to agricultural diesel. The finance ministry was already planning to raise an extra €3bn a year by returning the VAT on restaurant meals to the higher rate and it confirmed recently that this would still go ahead. 

“Seventy to 80 per cent of German restaurants are small businesses run by a family or entrepreneur and this tax increase will drive many out of business and change the industry to be more like the US, where big chains make up 80 per cent of the sector,” warned Üres.

Robert Mangold, head of the Tiger & Palmen Group, which owns a handful of restaurants in Frankfurt, said: “There will be closures, particularly in rural areas.” Menu prices would also rise sharply “because no hotel or restaurant has a 12 per cent profit margin and can compensate for this VAT increase from their income”.

Fast-food chains and takeaway outlets would continue to benefit from the lower VAT rate, which Mangold said would give them an unfair advantage at the expense of traditional restaurants. “This is the wrong signal in many ways, especially from a nutritional perspective.”

Economists, however, believe the warnings of a wave of bankruptcies and spiralling prices among German restaurants are overdone. “They’re exaggerating massively,” said Friedrich Heinemann, co-author of research into whether to prolong the tax break for restaurants published by the Leibniz Centre for European Economic Research in October. 

Heinemann said restaurants “already increased their prices massively” after the Covid lockdowns were lifted, when many consumers rushed to eat out again. 

This is supported by Eurostat data showing German restaurant prices have risen 23.4 per cent in the four years to October, outstripping both the national inflation rate and restaurant prices in the rest of the eurozone over that period.

The VAT increase will not affect drinks, which make up about a quarter of the average restaurant bill, so the overall cost of eating out is likely to increase only 4-5 per cent, Heinemann estimated. “Competition will anyway limit how much prices can rise.”

Some restaurants may fail because of structural changes in post-pandemic society towards working from home more and taking fewer business trips, all of which means people are eating out less. But Heinemann said this does not justify keeping the low tax rate.

“If there’s a long-run structural shift, it’s a bad idea to give subsidies to keep businesses alive, because that will only create zombie companies,” he said. 

There is little doubt January’s tax increase is coming at a tough time for the 200,000 companies in Germany’s restaurant sector. Their sales remained nearly 15 per cent below pre-pandemic levels in October and there are already early signs of rising financial stress in the sector, according to data from the federal statistical agency.

In the first nine months of this year, there were 893 insolvencies among German hospitality companies, which includes restaurants as well as hotels, bars and campsites. This is up more than a third from a year ago, but still well below the levels of close to 2,000 reached in the same period during the years shortly after the 2008 financial crisis.

Ingrid Hartges, general manager of the German restaurant association Dehoga, warned a much bigger upheaval was looming for the sector that would trigger “a progressive desolation of inner cities and rural areas, resulting in a loss of attractiveness and quality of life”.

To back up this dystopian vision of German high streets being filled by fast-food joints and takeaway outlets, she pointed to a survey of Dehoga’s members at the start of this month.

Almost two-thirds of those polled thought the tax rise would “hit them hard economically”, while 12 per cent feared being driven to the brink of collapse and 5 per cent said they would go out of business. It also found almost 89 per cent of restaurants expected to raise their prices.

“In total, we estimate that around 12,000 businesses will then face closure, with many small and medium-sized family businesses being particularly affected,” said Hartges. “There is so much frustration, complete incomprehension, anger, despair and resignation” over the tax increase, she said, adding: “We’ll keep fighting.”

But faced with steep rises in the cost of food, energy, fuel, rent and wages, some of Üres’s fellow restaurant owners in Hamburg are already preparing to get out.

“Several friends of mine plan to turn their restaurants into student flats — they’re all ready to go. This kind of thing will change the picture of German high streets in only a couple of years,” he said.