The richest 40% of households keep half of the food VAT reduction

Having more money means greater spending capacity, but also savings. These two sides of the same coin have been the protagonists of heated debates in recent months, as a result of the aid designed by the Government to mitigate the inflationary spiral. Among them is the VAT reduction applied to some staple foods, which came into effect at the beginning of this year and which does not discriminate based on family income: both the richest and the poorest benefit from the same identical discount, which generates an unavoidable distortion. “Five out of every ten euros that were not collected went to the 40% of households with the greatest economic capacity,” details a report published this Thursday by EsadeEcPol and entitled The reduction of VAT on basic foods: evaluation and recommendations.

In fact, Spanish families are the most exposed among European families to food inflation, which account for 25% of the household consumption basket, compared to 20.9% in the euro area, according to a report by the Bank of Spain. The supervisor explains that the sharp rise in the prices of these products is a source of concern for two main reasons. In the first place, the increase in the cost of “basic” products may imply a risk for access to healthy food and force a reduction in spending on other types of goods or services, especially for families with lower income levels. Secondly, spending on food is made more frequently than other types of spending, so the evolution of its prices has a particularly strong influence on the formation of consumer inflation expectations.

Faced with the wave of inflation, the Government temporarily reduced VAT on basic products such as bread, milk, eggs, fruit or vegetables from 4% to 0%; oil and pasta began to be taxed from 10% to 5%. The measure, in force since January 1, would have managed to reduce the pressure on the shopping basket —at least in the first two months of its application—, according to the study published by EsadeEcPol: between January and February, the tax discount It has been transferred “for the most part” to the final prices, at least in large stores. But the bulk of the savings provided would have benefited the highest incomes in absolute numbers.

The same perverse effect occurred with other general aid, such as the fuel bonus or the tax reduction on electricity supplies, which do not distinguish by income. And it is because spending increases as economic capacity grows: whoever earns more spends more money on purchases, and therefore saves more with tax cuts. In the case of VAT on food, it is 85 euros a year for the 10% of the wealthiest households and 35 euros for the poorest decile.

The authors of the report (Miguel Almunia, Javier Martínez and Ángel Martínez), who have reached these conclusions after analyzing the Internet prices of three large chains —which represent a joint market share of 40%—, clarify that the measure is indeed progressive with respect to total spending. The estimated saving is 0.3% for the most vulnerable families and 0.1% for those with the highest income. Quantities, however, that are small over total consumption, even more if compared with the percentages of price increases. “A targeted income transfer policy to low-income households would have been more effective from a distributive point of view, and cheaper from a budgetary point of view,” they conclude.

This appeal has already been made by various organizations, both national and international. From the IMF to the OECD they have called for measures focused on the most humble. The Tax Authority warned at the end of 2022 that the general reduction in electricity taxation benefits higher incomes more, who have a proportionally higher consumption. The Bank of Spain has estimated that giving 860 euros to vulnerable families would cost 4,790 million, half of what the State has stopped entering with the general tax cuts approved so far.

Food chain

The extraordinary rise in food prices has stirred the debate about whether anyone in the food chain is benefiting from the escalation. The Food Chain Observatory, a body attached to the Ministry of Agriculture, agreed on Wednesday to convene, starting in April, different working groups to analyze the prices of certain foods. It is about updating the reports of the value chain of extra virgin olive oil and milk, while new studies will be carried out on peach and nectarine, potatoes, tomato, citrus fruits and honey, “as the agrarian organizations requested”, explains the ministry in a statement.

These reports are descriptive studies of the set of costs involved in each marketing stage that a food goes through from its harvest in the field to the table, and establish the average values ​​for each of them. The goal: to give more transparency to the margins throughout the entire process.

Representatives of the Central Administration, of the communities and of all the links in the chain (producers, industry, distribution and consumers) have participated in the meeting, in which a report from the consultant Kantar has been analysed, certifying that the escalation of prices has had a notable impact on consumer behavior: they buy more times and fewer quantities, they buy more own brands and a reduction in the purchase of more expensive products, such as meat and fish, has been detected.

A study by the professors of the Autonomous University of Madrid Jaime Romero de la Fuente and Ignacio Cruz Roche has also been analyzed, in which it is reflected that, in 2022, “the prices of sale to the public have become less expensive than the prices of the food industry and the prices of its suppliers, farmers,” the ministry explains in a statement. “The report also reveals that retail distribution companies have increased their prices, although their revenues have increased to a lesser extent because consumers have made adjustments in their purchases”, for example, buying cheaper products.

The EsadeEcPol report warns that “it is possible that supermarkets correct the translation of the VAT reduction to prices in the medium term”, something that could only be analyzed in a few months. In addition, it stands out that the lack of information on retail establishments makes it impossible to know the real distributional effect of the policy. “In any case, under the current scenario, we can say that, although the measure has generally achieved its objective in terms of transferring the reduction to prices and a positive redistributive effect, a large part of the resources allocated to the measure they have gone to homes with high incomes”, he points out.

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