Zero VAT on Food Would Also Subsidise Wealthier Households, an IPP Budget Study Argues, as the Socialists Push for Its Return for Three Months in 2027

The Socialist Party (PS) wants to bring back IVA zero, the zero rate of VAT on a basket of essential foods, for the first three months of 2027. A new analysis of the 2027 State Budget argues that it is not the best way to help the households hit hardest by rising prices, and that cash paid directly to lower-income families would do more for the same money.

The argument comes from the Budget Watch report published on 5 November by the Institute of Public Policy Lisbon (IPP), a think tank, in a chapter written by the economist Tiago Bernardino, whom Público identifies as a professor at ISEG, Lisbon's school of economics and management.

What the Socialists propose

According to ECO, the measure is one of 180 amendments the PS has tabled to the budget. It would apply for an initial three months, to be reassessed as prices evolve. To pay for it, the party would scrap the government's income tax (IRS) break on so-called "moderate rents" of up to 2,300 euros a month, which ECO puts at 209 million euros. The PS says the 2023 experience showed the tax cut reached food prices.

Finance Minister Joaquim Miranda Sarmento rejected the idea at a parliamentary hearing on Friday, Público reported. He said zero VAT favours everyone, including people in the top income brackets, that there is no guarantee the cut reaches prices, and that the PS was "throwing away" rental housing policy "in exchange for one quarter of VAT reduction".

What the study finds

Between April 2023 and January 2024, 46 food products carried a 0 percent VAT rate. The IPP chapter accepts that this cut was passed on to shoppers in full, which it calls exceptional, citing a 2025 paper Bernardino co-wrote in the Journal of Public Economics. Elsewhere, pass-through has been incomplete: about 70 percent for Germany's temporary VAT cut in 2020 and 90 percent for Spain's food VAT cut in 2023, according to the studies it cites.

Even with full pass-through, the chapter argues, a price cut benefits every household, and in absolute terms the gain grows with what a family spends, so it grows with income. Public money therefore also goes to well-off households that have savings to absorb price rises.

Its alternative is temporary cash support aimed at lower-income households, either by topping up existing benefits such as the Complemento Solidário para Idosos (the pension supplement for low-income older people), child benefit (abono de família) and the minimum income (RSI), or through one-off payments made through the Tax Authority and Social Security, as with the 2022 "Famílias Primeiro" payment of 125 euros per adult earning up to 2,700 euros a month gross, plus 50 euros per dependant. Citing modelling Bernardino did with co-authors, it says even an equal payment to every household beats a VAT cut on essentials. It also warns that IRS cuts miss the poorest: about four in ten households filing a return pay no income tax.

What it means for you

Nothing changes at the till yet. Like the record 2,864 other amendments, the PS proposal needs a majority before the final budget vote on 24 November. The study notes that the budget bill itself includes no VAT cut on food or energy; its main direct help for low-income households is raising the older people's supplement from 670 to 720 euros a month.