Bank analysts note that this year inflation in Latvia will continue going up. It is expected to stabilise or go down no sooner than the end of the year. Inflation leaves a tangible effect on prices and consumers’ abilities to purchase what they want.
Latvia’s Ministry of Agriculture mentioned the reduction of VAT for primary food products as a possible solution. Such a step is unambiguous – it would create both advantages and problems. However, generally speaking, it will not accomplish the desired result at a level expected by part of society, says Dr.oec. Vita Zariņa of EKA University of Applied Sciences.
A much more significant effect, according to her, would come from changes to labour taxes, which would allow producers to not increase prices. It would also offer labourers more opportunities and help money stay in the domestic economy.
«The idea of reducing VAT for food is not new. In 2018 there was an experiment with a 5% VAT rate for fruits, berries and vegetables grown in Latvia.
A research performed by Latvia University of Life Sciences and Technologies affirmed that prices of fruits, berries and vegetables did drop by 11.7%. It should be noted that this drop did gradually equalise. The Ministry of Agriculture offers to reduce VAT from 21% to 5% for fresh meat, fresh fish, eggs and dairy products. In this context it is important to keep in mind that VAT reduction by 16% does not mean the price of products affected will drop accordingly. In a free market economy the state cannot dictated to producers and traders what to do after VAT is reduced. This is why there is a risk of mediators making money at the expense of this change, whereas consumers will not feel any real change in for their wallets,» explained the professor.
The previous VAT reduction for fruits, berries and vegetable did help reduce grey economy by 20% in the sector – the number of registered VAT payers also increased in the fruit and vegetables sector, as well as increase the turnover of goods and services, consumption of produce and the average size of wages. It is undoubtedly a positive trend, and it is expected that if VAT is reduced, some producers of primary food products may «exit from the grey zone».
«Looking at monthly expenses as a whole, we have to keep in mind that the wealthy residents are generally the ones who spend the most money on food. This means lower VAT will not affect poorer residents much. This poses the question which changes should be added to ensure the best possible benefits? If we want tangible changes, we should consider reducing labour tax. On the one hand this would help businessmen maintain a certain price level or meet consumers halfway. On the other hand it will offer opportunities for labourers. A lower tax burden would mean higher wage portion on their accounts. This means more purchasing opportunities. Assuming some labourers that are paid average wages will spend money in Latvia, not Paris. This means more money will remain in Latvia, which will benefit the state budget,» comments Zariņa.
«Looking at the idea to reduce VAT for food, I would invite government representatives to keep in mind that the economy involves multiple sides – producers, traders, consumers and the state budget. There is no single solution that would satisfy all sides and there will always be traders that will try to make some money off the situation. However, when looking for the most appropriate solutions in this inflation, we have to make steps that will provide tangible and focused support for the largest possible range of people, including those that need support the most,» said the professor.