Five out of every ten euros that were not collected went to the 40% of households with the greatest economic capacity
MADRID, 30 Mar. (EUROPA PRESS) –
The ESADE Center for Economic Policies (EsadeEcPol) has verified that the VAT reduction on certain foods approved by the Government is being transferred mostly to prices, although it considers that the measure is “costly and inefficient”, since it allocates higher aggregate public spending –(in euros that are no longer paid for VAT– for higher-income families.
According to the report ‘The reduction of VAT on basic foods: evaluation and recommendations’, prepared by EsadeEcPol, five out of every ten euros that were not collected went to the 40% of households with the greatest economic capacity.
On January 1, 2023, the reduction of VAT on basic food items from 4% to 0% came into force; and other basic foods (such as raw pasta or oil) went from 10% to 5%. Unlike what has happened in other countries, the VAT reduction was transferred in its vast majority -more than 90%- to the final prices between January and February, at least in large stores, as verified by the center of studies.
The redistributive impact of the measure is progressive because it means greater savings for low-income households in proportion to their total spending. However, as the economic capacity of the household increases, spending on food such as fruits, vegetables, bread and cheese also increases. This means that the measure allocates greater aggregate public spending (in euros that are no longer paid for VAT) for higher-income families. Five out of every ten euros that were not collected due to the VAT reduction went to the 40% of households with the greatest economic capacity.
The study thus concludes that 50% of the income that has ceased to enter the public coffers has led to savings for households in the four upper deciles of the distribution. However, the measure has been progressive if its impact is measured as a percentage of household spending. In other words, it means greater savings for low-income households in proportion to their total spending.
For their part, from EsadeEcPol they point out that the total impact of this measure is modest compared to the size of the inflationary shock. Food prices rose 16% in 2022 and this measure only represents a 3.5% reduction in the prices of a specific subgroup of foods.
As the evidence systematically shows, from EsadeEcPol they point out that targeted transfer policies for low-income households tend to be more effective from the distributive point of view, and cheaper, although they present more implementation difficulties. The analyzes of other institutions such as the Bank of Spain (García-Miralles, 2023), Fedea (López Laborda, Marín González and Onrubia, 2023) coincide with this conclusion.
From the study center they recognize that the analysis has some limitations that it is important to consider. In the first place, the data is limited to the prices on the Internet of three large supermarket chains and they do not have information on the prices of these same chains in their physical stores, nor those of other smaller establishments, which could have reacted differently. differently to the same tax cut. “In the future, it would be desirable to carry out a more extensive analysis that includes price data from other establishments,” they point out.
In addition, the analysis carried out focuses on the short term, since there is only data for the two months after the application of the measure. It is possible that supermarkets correct the transfer of the VAT reduction to prices in the medium term, which can only be analyzed in a few months when there is data for a longer period.
In addition, it is recognized that the products that are used to simulate how the prices of the products affected by the VAT reduction would have evolved are limited in number and variety.
