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Consumption Growth Rate Fuelled by Tax Cuts – Achieving Last Year's Christmas Sales Figures would be a Success

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  • Michael Wüger

    (WIFO)

Abstract

Tax cuts like those of 1 January 2000 drive consumer demand, even though only part of the liquidity thus gained will be spent on consumption, whereas savings grow to an even greater extent. The propensity to save rises, at least in the short term, as is the case when the economy is on an upswing. The effect achieved by the cut in direct taxation is countered by the marked rise of some energy prices (especially fuels and heating oil) and the increase of indirect taxes in the second half of 2000, which jointly dampen demand because of their reduction of real income. Energy consumption is forced upon captive consumers, at least in the short term, so that the savings rate usually declines when energy prices go up. Demand was brisk in the first half of 2000 because the effects of the tax reform and the business upswing counteracted the effects of rising energy prices, a situation which also profited retail sales. Since mid-year, retailers report lower sales – a fact which does not give rise to considerable optimism in view of Christmas season. Private household expenditure for private consumption in the first half of 2000 was about 5 percent in nominal terms and 3.5 percent in real terms above the previous year's figures. As expected, the distinct rise was achieved in spite of a greater savings rate. Real demand for durable consumer goods stagnated in the first six months of 2000. Declining expenditure for passenger cars due to so-called echo effects, and for furniture in the course of the sagging growth in residential building was offset by a growth in expenditure for leisure goods. Conspicuous growth was found in expenditure for communications in the train of the sustained handy and Internet boom. Thanks to greater consumer goods spending on the part of the Austrians, and the higher growth rates enjoyed by the local tourism industry, retailers reported brisk business in the first half of 2000. Wholesalers achieved even higher growth rates than retailers, since industrial production and foreign trade were both expanding vigorously. Prices rose faster in the first six months of 2000 than in the previous years, due to the hefty rise in oil prices. Productivity had also picked up markedly: it appears that keener competition drives streamlining measures. Accordingly, employment is rising at a slow rate only, apparently extending primarily with regard to part-time and marginal jobs. In the second half of the year, retail business was slackening. Average sales in July and August were below the high level of the previous year – a fact which does not give rise to much optimism for Christmas season sales, which is of special import for some sectors. According to the WIFO estimation, Christmas season sales are those sales in December which are in excess of a normal measure calculated using key factors for retail trade development (trend, business cycle, season, calendar, fiscal measures, special effects, etc.). Because of a current change in the statistical base, only a trend can be usefully derived this year. Calculations show that achieving the previous year's levels for Christmas season sales should already be considered a success.

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Bibliographic Info

Article provided by WIFO in its journal WIFO-Monatsberichte.

Volume (Year): 73 (2000)
Issue (Month): 12 (December)
Pages: 727-735

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Handle: RePEc:wfo:monber:y:2000:i:12:p:727-735

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Keywords: Konsumwachstum fiskalisch gestützt. Weihnachtsgeschäft erreicht reales Vorjahresniveau knapp; Consumption Growth Rate Fuelled by Tax Cuts – Achieving Last Year's Christmas Sales Figures would be a Success;

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