By Chrysostomos Tsoufis

Although the inflation appears to have been brought under control, the debate on whether or not to cut VAT remains, given that prices continue to rise even if the rate is now ….tolerable.

In the debate so far, the voices – of the opposition – supporting the measure have used the examples of Spain primarily and secondarily Germany, France, Belgium and Italy which proceeded with (temporary) VAT reductions to support their positions.

OR Bank of Greece however, it comes to “stir” the waters as in its interim report on Monetary Policy it studies the impact that a possible reduction of VAT would have on the Greek market.

Central Bank economists assume a horizontal general reduction of VAT by 1 unit to 23% over a period of 2 years.
As the report notes and can also be seen in the diagram below, after the 2nd quarter and up to the 5th quarter there is a small decrease in inflation which is characterized as NOT statistically significant. From the 5th to the 8th trimester this small effect is even more limited. According to the report “the pass-through of the reduction in the VAT rate to retail prices should not be expected and it is not expected to have a significant contribution to the fight against inflation in the Greek economy”.

The central bank does not stop there and also answers why the VAT reduction will not bring about the expected results.

The answer lies in the structure of the Greek market in which monopolies or oligopolies prevail.

And in such environments as pointed out, producers develop pricing strategies that lead to an incomplete pass-through of any tax breaks and other cost reductions.

The result of the “experimental measurement” of the CoE is wind in the sails of the government which had as its main argument that a reduction will never reach the consumer because it will be lost in the pockets of the middlemen of the supply chain. That is why in the 2nd round of tax reductions that she is planning until the end of her term, the reduction of direct taxes and mainly of the rates of the income tax scale has a central place.

On the contrary, however, the Central Bank speaks of monopolies and oligopolies for the “prosperity” of which governments cannot but be responsible.
That is why it calls for measures to strengthen controls and competition. These combined with the expansion of e-commerce could work beneficially so that a reduction in VAT rates is not lost along the way for the final consumer.