It remains costly, inefficient, and its impact on inflation is modest. A value-added tax reduction on a variety of essential foods and needs has not yet become a viable option. General price increases—especially in the food sector—continue to rise, while government revenue suffers. The policy disproportionately affects higher-income households. A recent study from a leading policy center shows that half of the revenue loss from this tax cut would go to the top 40 percent of households by economic capacity.
According to the National Institute of Statistics, the report breaks down families by spending and by a broad range of food items, including oil, fruit, eggs, milk, legumes, bread, pasta, cheeses, tubers, and vegetables. It finds that households with the highest incomes would save about 85 euros if the measure were in force for a full year. In contrast, households with tighter budgets would see only about 35 euros in savings. Economists Miguel Almunia, Javier Martinez, and Angel Martinez note that, if this were treated as direct investment, the benefits would flow more strongly to higher-income groups.
Public policy expert Jorge Galindo, deputy director of Esade EcPol, frames the dilemma for decision makers facing inflation that hurts low-income groups most: the fiscal path offers two options—targeted transfers or tax cuts for everyone. He adds that the latter would reach people faster but would increase public expenditure for those who need help the most.
The simple takeaway is that if a 5 percent saving translates to 20 euros for a wealthy family but only 2 euros for a poor one, then the state ends up allocating more resources to the richer household, or the savings simply fail to materialize for those most in need.
modest effect
Those 85 and 35 euro savings figures do reflect a share of total food spending. Esade EcPol’s analysis shows that top-income households spend about €2,000 per year on food, while lower-income families spend around €600. Because the lower-income group spends 70 percent less, their savings rate remains around the same, roughly 0.3 percent versus 0.1 percent for higher-income households.
It is also important to note that the overall impact of this measure is small relative to the scale of the inflation shock being addressed: food prices have risen more than 13 percent since 2021, and the measure reduces food prices by only about 3.6 percent for the targeted subgroup, according to the reporting team.
real effect
Another consequence is that price drops for goods covered by the VAT reduction occurred primarily in the first week after the measure began. Since then, prices have continued to rise, with the latest movement approaching the end of the year. Economists in the group describe the policy as an inefficient income transfer rather than a targeted VAT cut with lasting effects. They argue that a targeted income support for low-income households would be more effective in distribution and cheaper in the budget. If public spending is to be efficient, extra effort is needed, says Galindo. Instruments such as a Minimum Vital Income, even with some polishing, and other tools like negative income taxes or income-based aid packages, hold greater promise for real impact.