Boosting Consumer Demand in Spain: The Impacts of the Value-Added Tax Exemption on Essential Food Products

Abstract

The COVID-19 pandemic and the ongoing war in Ukraine have increased global uncertainty and inflation. In January 2023, Spain introduced a 0% value-added tax (VAT) rate on essential food products to mitigate inflation. This study examines the impact of the VAT exemption on changes in consumer demand. Using a fixed-effects model, we assess whether average demand across eight essential food categories has increased since Spain implemented the VAT exemption policy. The results indicate a statistically significant rise in demand, ranging from 1.7% for bread to 10.1% for tubers and legumes. Although lower socioeconomic-status households generally purchase more basic staples, we find no statistically significant differences in demand changes across socioeconomic status groups for most essential foods after the VAT exemption, except for flour, milk, and vegetables. Our study sheds light on the distributional effectiveness of the VAT exemption by examining its impact on consumer demand.