There is strong evidence that businesses have managed to pass on increases in imported costs to prices and significantly boost their profits, especially during the intense phase of inflationary pressures, a study by the State Budget Office in Parliament has found. At the same time, however, the study shows that the proposed VAT reductions are not an appropriate tool for solving the structural problem of price inflation in Greece.

Specifically, and according to Athens News Agency, the Budget Office proceeded with an analysis of GDP inflation in its main components to draw a conclusion on the contribution of labour costs and corporate profits to its evolution, particularly since the period of the pandemic and the war in Ukraine that exacerbated inflationary pressures.

The analysis shows that profits had more than doubled the contribution to the cumulative increase in deflationary GDP by 2024 relative to wage costs. But the momentum of earnings has slowed down significantly from Q1 2023 to Q1 2024, and during this period, the share of wage costs in GDP inflation exceeds the share of earnings by about twice as much as the share of earnings.

This analysis provides strong evidence that firms, either due to reduced competition or increased demand driven by increased household savings stock and tourism, have been able to pass on increases in imported costs to prices and significantly boost their profits, especially during the strong phase of inflationary pressures, the Budget Office notes.

ABOUT VAT

On the occasion of the public debate and the prospect of reductions in indirect taxes, such as VAT, especially on consumer products such as food, the Office has undertaken a review of the international literature examining the pass-through of VAT to final consumer prices.

Following a thorough analysis of a large number of products in 27 EU Member States with regard to the impact of VAT changes (fluctuations) on final consumer prices, three interesting findings emerge.

• First, only a small part of the VAT reductions, around 6%, is passed on to final prices and only in the short term. In contrast, VAT increases are passed through to final prices by about 34%. Moreover, the reintroduction of VAT rates leads to disproportionate price increases, which is to the detriment of the consumer.
• Secondly, after a period of 10 months following the VAT reduction, consumer prices return to the levels they were at before the reduction.
• Thirdly, VAT reductions seem to lead to an increase in the profit margins of businesses at the expense of consumers.

The first findings of a study focusing on the Spanish example show that the almost complete pass-through of the VAT reduction in the first few months subsides significantly within a quarter.

Taking into account the above and the competitive conditions in the Greek market compared to the Spanish market, the Office estimates that any impact on final consumer prices from a VAT reduction in Greece, if any, is expected to be smaller or much smaller and more short-lived than in Spain.