Inflation remains high. Food prices increased by a good 21 percent between November 2021 and November 2022. In order to relieve the households, a discussion about reducing the VAT on certain foods is boiling up again. At the beginning of January, Federal Minister of Agriculture Cem Özdemir (Die Grünen) again advocated the abolition of VAT for healthy food. The Federal Environment Agency (UBA) and the Federal Association of Consumers (VZBV) are also calling for the abolition of VAT on plant-based foods.

In principle, staple foods have so far been taxed at a reduced VAT rate of seven percent. For other products, 19 percent is charged. A VAT exemption for fruit, vegetables, grain products and vegetable oils could mean annual savings of around four billion euros for private households, according to an initial estimate by the head of the Federal Environment Agency, Dirk Messner.

However, not everyone benefits equally from such a measure. Households with lower incomes spend a relatively large proportion of their money on food compared to wealthier households. Accordingly, they would also have more of a VAT reduction on food.

Sebastian Dullien from the Hans Böckler Foundation says that high earners who need it less would also save on food through such a measure. “The French cheese from the delicatessen for 5.99 euros per 100 grams would be around 40 cents cheaper, the packaged Gouda for 60 cents per 100 grams just four cents”, calculates the economist as an example. In absolute terms, the richer would be relieved more – but not necessarily in relation to their total income.

In addition, wealthy households spend up to twice as much money on food in absolute terms as compared to households with lower incomes. Not because they eat more, but because they consume more expensive, higher-quality foods. Stefan Bach from the German Institute for Economic Research (DIW) points this out.

In addition to financial relief, lower prices for certain foods should also have a steering effect: towards vegetables and away from meat. “The aim of such a reduction in VAT would be to increase the incentive for a healthy and sustainable diet by making fruit and vegetables cheaper, especially compared to animal foods such as meat,” says Anne Markwardt from the VZBV consumer advice center.

“Even if many people in Germany do not like to hear this, we need to consume much less meat and other animal products,” said Marcel Fratzscher, President of the German Institute for Economic Research (DIW). Thus, an exemption from VAT on fruit, vegetables and cereals is an important and overdue decision by the federal government from a social, ecological and health perspective.

Lower prices could also help organic foods. Farmers’ president Joachim Rukwied complains that health food stores and other businesses that market high-quality organic products are currently suffering from a massive drop in sales. “At the moment, the organic trend is clearly towards the discount sector.” Many farmers are therefore a little more cautious when it comes to converting to organic production.

However, such a steering effect can only unfold if the reduction in VAT is also passed on to consumers by companies. “In principle, we have relatively high competitive pressure in the German food retail trade, so one can expect that the VAT reduction will be passed on to private households, at least in the longer term,” says Stefan Bach from the DIW. In the short and medium term, he doubts that companies will be quick to pass on a VAT cut given the high inflation, energy and other costs.

A look at the temporary VAT reduction in the second half of 2020 gives an indication of how companies are reacting to VAT changes. At that time, VAT was reduced for six months (from 19 to 16 percent at the regular tax rate and from 7 to 5 percent at the reduced rate). Tax rate).

According to an investigation by the Bundesbank, 60 percent of the tax cut was passed on to customers overall. The researchers at the Munich Ifo Institute came up with 70 to 80 percent for the food sector. However, the situation was different then, because not only food was affected by the VAT reduction, because there was no such inflation as now and because it was known that the tax relief was only temporary. Overall, it is difficult to predict the effect of a VAT reduction, says Bach from the DIW. There is simply not enough experience, because VAT is a rather young tax, which in the past has mostly tended to increase.

But what can be estimated is how much money the state is losing. Currently, the levying of 7 percent VAT on groceries brings in revenues of around 15 billion euros a year, says Bach. “These revenues would then disappear and would have to be compensated for by other revenues or the deficit would increase further.”

This money, which the state would not receive from a reduction in VAT, would then be lacking for important tasks in the coming years – such as upgrading the infrastructure, strengthening the education system and decarbonization, complains Dullien from the Hans Böckler Foundation.

But: Anne Markwardt from the VZBV objects that the VAT exemption for fruit and vegetables promotes a healthy diet and thus saves costs in the long term, for example in the health system.

A VAT reduction would also have a small effect on the relatively high inflation. After all, according to the Federal Statistical Office, food accounts for almost ten percent of the shopping basket used to measure inflation in 2022. The measure could reduce inflation by an estimated 0.6 to 0.7 percent, says Bach.

While this is still being discussed, other countries have already taken the lead. Poland and Turkey have already reduced their VAT on food in 2022. But also on meat.

In Spain, on the other hand, VAT on staple foods such as fruit, vegetables, bread and milk has been temporarily completely canceled since January 1, 2023 – meat and fish are exempt from the regulation. The tax exemption will initially apply for six months.

While this has generally caused prices to drop, in the first week of January the Spanish consumer protection organization FACUA denounced seven retail chains to the National Competition Commission for failing to pass on the reduction.

Author: Insa Wrede

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The original of this article “How food is becoming cheaper again” comes from Deutsche Welle.