A study by the Bank of Spain analyzes the effects of the VAT reduction
Different effects on processed products
The Spanish Government has taken an important decision to react to the increase in food prices. As a temporary measure, the VAT on olive oil has been reduced to 0% until 30 September. The main objective of this reduction is to ease the economic burden caused by the increase in food prices, which have been growing at a higher rate than wages.
A recent study carried out by the Bank of Spain has analyzed the effects of the VAT reduction on food. This study has classified products into different categories and compared the effects of reduction in these groups. The results show that the transfer of the VAT reduction to supermarket prices has been practically complete, with percentages ranging from 70% to 100%.
The results of the study also indicate that processed products appear to be less likely to reduce their prices during the first two weeks after the policy comes into force. No significant difference is observed between branded and private label products, as both show high levels of VAT pass-through. In addition, it is highlighted that imported products have a divergent trajectory one month after the tax change, being persistently below 100% of the translation.
In conclusion, the reduction of VAT on olive oil is a temporary measure that seeks to alleviate the impact of food prices. The study by the Bank of Spain shows that the transfer of the reduction in VAT to supermarket prices has been practically complete. However, it is observed that processed products have a lower tendency to reduce their prices during the first weeks of the policy. This information is important to understand the effects of this measure and to evaluate its theoretical and empirical adequacy.
