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Luxembourg VAT cut gives limited inflationary relief

2023 1-year cut in VAT rate from 17% to 16% largely retained by businesses and not passed to consumer

Luxembourg’s national statistics agency, Statec, has concluded that the temporary Luxembourg 1% standard  VAT cut to 16% has largely not been passed onto consumers. Inflation only dropped by 0.2%, with businesses failing to pass on the savings to customers. Statec estimates, allowing from other inflationary pressure, inflation should have dropped by 0.4% following the VAT rate reduction.

The VAT cut cost an estimated €317 million in lost tax revenues.

This was based on analysis for the first quarter of 2023. Luxembourg’s inflation was 2% in May, down from 2.7% in April and 9.1% a year ago.

Many other countries are cutting VAT on electricity and food as global inflation rises due to supply chain problems caused by COVID-19 pandemic disruption and the invasion of Ukraine by Russia.

This comes despite IMF criticising inflation VAT cuts in a report last year, and has been joined by the OECD review of VAT reductions and other policy remedies.


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