Osman Şenkul
The Stockholm University Institute for International Economic Research’s study, published on 17 June 2025, entitled “Cutting VAT, Cutting Prices: How a temporary tax policy brought real relief to Portuguese shoppers?” states:
“What happens when the government slashes taxes on basic food items? Do prices actually fall or do retailers pocket the difference? In 2023, Portugal put that question to the test. In an effort to ease the sting of food inflation, the Portuguese government temporarily cut the value-added tax (VAT) on 46 essential food items (from bread and pasta to vegetables and milk) from 6% to 0%. The policy began in April and ran until early January 2024. This policy began in April and continued until the beginning of January 2024. Research shows that the VAT reduction worked exactly as intended. Prices fell immediately, remained low for months, and returned to their previous levels when the tax was reinstated. In other words, the VAT reduction was passed on to consumers in full, persisted, and then reversed cleanly.
Using a unique dataset of daily online prices from four major supermarket chains, the researchers tracked the prices of over 43,000 food products, over 10,000 of which were directly affected by the VAT reduction.
The researchers listed their “key findings” as follows:
“Immediate impact: Prices of VAT-exempt items fell by the full amount of the tax (approximately 5.66 per cent) as soon as the reduction came into effect.
“Persistent impact: Prices remained low throughout the nine months the policy was in place.
“Symmetry: When VAT was reintroduced in January 2024, prices rose by approximately 6.00 per cent, returning to pre-reduction levels. This meant that the policy provided a full, permanent and symmetrical transition to consumer prices.”
Researchers believe that the success of this tax reduction measure can be explained by ‘two key factors’:
High visibility (or ‘prominence’): The VAT reduction was widely publicised. Supermarkets clearly labelled the affected products, media outlets reported extensively on the issue, and consumer groups closely monitored prices. In a high-inflation environment, shoppers were already paying close attention to food costs, making any price changes more noticeable. This public pressure forced retailers to pass on the savings to consumers.
Falling wholesale prices: During the same period, producer prices (the prices supermarkets paid to their suppliers) were falling. This gave retailers more room to lower prices without affecting their profit margins.
Portugal’s temporary VAT reduction not only benefited individual shoppers but also had a positive impact on the national economy. This policy reduced the inflation rate by 0.68 percentage points.
Researchers described this development as ‘a meaningful result for a country trying to reduce the cost of living’ and added:
“However, this policy came at a cost: the government forgone over 500 million euros in tax revenue. This is comparable to the amount spent on direct cash transfers to families during the same period. Critics may argue that direct aid could have been better targeted, but the transparency and effectiveness of the VAT reduction cannot be overlooked.”
The researchers’ assessment also summarised the answer to the question, “How did Portugal reverse this trend?” as follows:
“Portugal’s VAT experiment stands out because similar efforts elsewhere have often disappointed. In many countries, VAT cuts only partly lower prices and when the tax returns, prices rise more than they should. The Portuguese case shows that, under the right conditions (clear communication, high public awareness, and cooperative retail markets) tax cuts can translate directly into consumer savings. As countries around the world grapple with inflation, Portugal’s approach offers an important lesson: when it comes to fighting rising prices, design and execution matter as much as the policy itself. A temporary VAT cut in Portugal was fully passed on to food prices, stayed in effect for months, and reversed cleanly – an unusual but encouraging success story for economic policy.”
First of all, I would like to thank the Minister of Treasury and Finance, Mehmet Şimşek, for making this ‘encouraging success story’ accessible to me. Had he not felt compelled to make this statement on 3 October following the release of September’s inflation figures, I doubt I would have been able to access this important study, because, immediately after Şimşek’s statement, I felt compelled to conduct research:
Mehmet Şimşek:
“Food prices were the determining factor in the high monthly inflation rate in September.
Food inflation caused by frost and drought was 3 points above the long-term September average and contributed 1.1 points to monthly inflation.
With schools starting in September, the education group and related items contributed approximately 0.7 points to monthly inflation.
The main trend in inflation indicates that disinflation will continue.
With the reduction of seasonal effects and the supply-side policies we are implementing, we will ensure the continuation of disinflation, which is our programme priority.”
Yes, as I mentioned above, as soon as I read Şimşek’s statement, the question came to mind: ‘If the government knew the reason for this surge in inflation, why didn’t it take action?’ Moreover, and more importantly, the door to this situation had been opened in the spring months when the ‘agricultural frost’ occurred, and it had been thrown wide open during the ‘drought’ period of the stifling summer months. What’s more, these words were spoken by Mehmet Şimşek, the experienced Minister of Treasury and Finance, who is responsible for collecting taxes. More importantly, let’s say that such a solution had not occurred to them; were they not looking at their surroundings at all? If they had been following what was happening in the world, they would have learned about Portugal’s important solution long ago and immediately taken measures after the agricultural frost, adding a new step to what they thought were their steps towards reducing inflation.
After all this, the following thought comes to mind: perhaps the following dialogue took place:
“Dear Mr Minister, the frost has severely affected crop production, and meteorological data also indicates that the summer months will be dry. Should we follow Portugal’s example from last year and remove VAT on food products?”
“Portugal, with its tiny population, gave up 500 million euros. What about us?”
“But sir, in Portugal, the general VAT on food products is 6 per cent, while in our country, VAT on foodstuffs is 1.0 per cent and 10 per cent in places offering food services. What I mean is, our loss would not be that great.”
“If it won’t be that significant, why should we eliminate the tax?”
“Prices are rising due to low supply, so we can provide some support…”
“Let’s not get people used to tax-free sales; it’s not right.”
“Then, at the very least, to reduce the impact of low supply, let’s remove the tax on imports of the most popular food products…”
“…….”
As we have all seen, the latest data released shows that the target of reducing inflation in Turkey to below 30 percent this year is now unattainable; the consumer price index (CPI) rose by 33.29 percent annually and 3.23 percent monthly. According to ENAG (Inflation Research Group), inflation stood at 3.79 percent on a monthly basis and 63.23 percent on an annual basis. It was noteworthy that the difference in inflation between ENAG and TÜİK (TurkStat) nearly doubled on an annual basis.
Economists had predicted that inflation would increase by 2.47 percent on a monthly basis. September inflation came out at 3.23 percent, which is excessively high: In the words of Prof. Dr Hayri Kozanoğlu, “The inflation target of below 30 percent by the end of 2025 has also fallen through. In short, the disinflation programme is not going according to plan.” As economist Mustafa Sönmez also stated, “Education played the leading role in September’s inflation, with a monthly increase of 18% and an annual increase of 66 percent. In September, food prices rose by 4.6 percent and exceeded 36 percent annually.”
In short, as in many areas, when it comes to combating inflation, “it is not the target that matters, but taking and implementing measures.”