Greek study backs limited effectiveness of using VAT cuts to take on inflation spikes
A recent study by the Bank of Greece (BoG), published in its Economic Bulletin, concludes that temporary VAT reductions have a limited effect on curbing inflation. The research, conducted by economists Georgios Paleodimosand Dimitris Papageorgiou, emphasises that VAT cuts only become effective disinflationary tools when combined with structural reforms aimed at enhancing competition and reducing distortions in the economy.
In Greece, temporary VAT reductions introduced during the COVID-19 pandemic—such as the 13% rate on hospitality services and the 6% rate on face masks and gloves—expired as of January 1, 2024, with rates reverting to the standard 24%. Exceptions remain in place until June 30, 2024, for certain items like coffee and taxi transport services, which retain a reduced 13% rate.
The study underscores that permanent VAT reductions tend to be more effective than temporary ones. They strengthen policy credibility and positively shape public and business expectations. In contrast, short-term VAT cuts, without broader policy support, have minimal impact on price levels and inflationary trends.
The overall message is clear: VAT cuts alone are insufficient. They should be part of a comprehensive economic reform package that includes long-term measures to improve market efficiency.
Other inflation-fighting VAT cuts
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Germany (2020): Temporarily reduced VAT during COVID-19, which gave a short-term boost to consumption but had limited impact on lowering inflation.
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UK: Also cut VAT for hospitality during the pandemic, but studies showed mixed results in terms of inflation control.
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France & Spain: Used targeted VAT reductions during both COVID and the 2022 energy crisis, but again found minimal disinflationary effects unless paired with subsidies or regulatory reforms.
In general, international evidence supports BoG’s conclusion: VAT cuts can ease consumer costs temporarily, but sustainable inflation control requires structural economic changes.
