Denmark’s food VAT cut would cost the state an estimated DKK 17.4 billion (€2.3 billion) a year, according to calculations from the Ministry of Taxation, while economists, businesses and opposition parties are questioning its administrative costs, its effect on supermarket prices and the way the government plans to finance it. The four-party government has nevertheless said the reform will be introduced during the current parliamentary term.
The proposal is one of the most significant economic measures included in the political programme of Prime Minister Mette Frederiksen’s new government, formed in June by Socialdemokratiet, Socialistisk Folkeparti, Moderaterne and Radikale Venstre.
Denmark currently applies a standard 25% VAT rate, including to food. The government wants to halve VAT on food and abolish it entirely on fruit and vegetables as soon as implementation allows.
At the presentation of the government’s programme for the parliamentary year, Foreign Minister Lars Løkke Rasmussen and Minister for Economic Affairs and the Interior Pia Olsen Dyhr said differentiated VAT would be introduced during the current government term.
Denmark’s food VAT cut would cost €2.3 billion a year
According to calculations from the Ministry of Taxation reported by DR, implementing the full proposal would reduce public revenues by DKK 17.4 billion (€2.3 billion) annually.
The policy expands on an agreement reached before the March election. The previous government had already agreed with several opposition parties to establish a framework for reducing VAT on either food generally or fruit and vegetables. The new government programme goes further by committing to both measures: a lower rate for food and zero VAT on fruit and vegetables.
The measure is intended to address the impact of higher food prices on household budgets. Frederiksen had already identified food prices as a political priority before the election, and the new coalition now presents VAT differentiation as a structural way to lower prices rather than relying only on temporary financial support.
The first problem identified by critics is the administrative complexity of moving away from Denmark’s largely uniform VAT system.
Businesses would have to classify products according to different tax rates, while the Danish Tax Agency (Skattestyrelsen) would need systems capable of handling and monitoring those distinctions.
The Confederation of Danish Industry (Dansk Industri, DI) has estimated that differentiated VAT could create at least DKK 1.1 billion (€147 million) in additional annual administrative costs for companies, even under relatively optimistic assumptions. Its central estimate is considerably higher, at around DKK 2.75 billion (€368 million).
The organisation argues that the reform would affect not only supermarkets and food producers, but potentially any company purchasing or selling food, while creating difficult distinctions between products belonging to different VAT categories.
Lower VAT does not necessarily mean equally lower prices
A second question is how much of the tax reduction would actually reach consumers.
In principle, removing the current 25% VAT from a product would allow its final price to fall substantially if the entire reduction were passed on. But economists cited by DR have warned that part of the benefit could instead be absorbed along the supply chain through higher margins for producers, wholesalers or retailers.
Economics professor Carl-Johan Dalgaard has argued that this risk is particularly relevant in markets where competition is limited.
Frederiksen said the government intends to work closely with the retail sector to ensure that the lower tax translates into cheaper shopping rather than higher supermarket profits.
The effectiveness of the reform will therefore depend not only on the VAT rate established by parliament, but also on how businesses adjust their prices after the measure takes effect.
The financing plan would also raise some taxes indirectly
The third controversy concerns how the government intends to finance part of the reform.
According to DR, the coalition proposes temporarily freezing tax deductions and monetary thresholds in nominal kroner for two years, rather than allowing them to increase in line with wages as they normally would.
This would mean, for example, that some personal tax allowances would remain unchanged even as wages rise. Taxpayers would consequently pay more tax than under the existing indexation system.
The mechanism has been criticised by several opposition parties. Dansk Folkeparti, Venstre and Det Konservative Folkeparti have argued that households could face a certain increase in taxation while the eventual size of the reduction in supermarket prices remains uncertain.
Liberal Alliance has also opposed the differentiated VAT proposal more broadly.
Løkke Rasmussen said that the additional revenue generated by freezing tax thresholds would be returned to households immediately, although the precise timetable for the freeze and the introduction of the new VAT rates has not yet been established.
The government says the reform will happen in this term
Despite the criticism, the government has made the policy part of its programme for the current parliamentary term.
The commitment also marks a broader change in Danish tax policy. Denmark has traditionally relied on a comparatively simple VAT structure centred on a 25% standard rate, while differentiated rates are common elsewhere in the European Union.
The political question is now moving from whether Denmark should introduce lower VAT on food to how the system will be designed, financed and monitored. The government will also have to demonstrate that a reform costing more than DKK 17 billion a year produces a comparable benefit for consumers rather than being partly absorbed by the administrative costs and pricing decisions it creates.
