Price tags in shops indicate that so far vendors have reduced prices and not used the cut to extend their margins.
“We don’t have any information about possible price increases in November and December,” said Agriculture and Rural Development Minister Ľubomír Jahnátek on January 3 after checking, along with Prime Minister Robert Fico, prices in a shop in Senec. “We think that the vendors have approached the drop in VAT very responsibly.”
The Fico cabinet reduced the VAT on fresh meat and freshwater fish, butter, fresh bread and milk, but not yogurt and cheese, at the beginning of 2016 as one of the measures of its so-called second social package. It believes that apart from cheaper foods the lower VAT will also mean support for local producers.
“We’ve decided to apply the reduced VAT only to selected basic foodstuffs that people buy the most,” said Fico.
The drop in VAT by 10 percentage points should reduce prices of these goods by 8.3 percent. Vendors have calculated that people buying basic foods for six to seven euros daily should save €15 to €20 per month. The cabinet estimates that the VAT reduction will cost the state budget about €80 million annually, but also hopes that lower VAT may boost sales and partly compensate for the drop.
Shops are labelling goods with the reduced VAT with dual price tags showing the exact price reduction. The cabinet will monitor the prices in shops in cooperation with the Association of Pensioners and other organisations. But Fico and Jahnátek expect that competition will play a more important role.
“Negative advertisement is the worst that they can encounter,” said Jahnátek.
The minister recalled that retailers have signed a memorandum with the cabinet that they will fully reflect lower VAT on prices.
“We’re monitoring 10 big chain stores and 183 shops, where we repeatedly check the same items,” said Jahnátek.
Some retail chains used the VAT reduction for marketing purposes and declared that they reduced prices on selected foods already before the lower VAT became effective.
Prices will be monitored until June. Fico said that by the end of this year they will evaluate what the lowering of VAT has brought and whether it’s worthwhile to expand the decrease of VAT to other items.
“We will wait to see how this measure will affect domestic producers and if it will lead to increased consumption of these products,” said Fico. “If the results are positive, I don’t see any reason why not to continue and expand its scope.”
Low inflation, good harvest
Economic analysts point out that prices of meat as well as butter should have decreased last year anyway as a result of developments on the market and that not all retail chains did so.
“Prices in animal production making up the better portion of foods on the list with the reduced VAT, decreased relatively steeply,” said Ľubomír Koršňák, analyst with UniCredit Bank Czech Republic and Slovakia. “During the summer months of 2015 the year-on-year drop in prices in animal production deepened to as much as 6-7 percent on average when their prices decreased more quickly at the turn of 2009 and 2010 the last time.”
The Slovak Agricultural and Food Chamber (SPPK) also recalled that due to a good harvest of summer cereals their prices did not increase in 2015. Moreover, milk prices decreased on European commodity exchanges last year too, by as much as 15 percent as a consequence of cancelation of quotas as did prices of slaughter pigs, poultry and fish. These drops reflected in final prices in Slovakia only partly by the end of 2015. Thus there is still space for further reduction of prices due to the development in the agricultural primary production as well as the VAT reduction.
The developments in consumer prices have kept inflation in negative territory in Slovakia. It was -0.1 percent in 2014 and for 2015 it is expected to be between -0.3 and -0.5 percent.
The opposition sees the VAT reduction as part of the Smer campaign for the March 5 parliamentary elections. It also recalls that in the past it had proposed VAT reduction on food, but the Smer government turned down such proposals. The opposition Most-Híd party has also criticised the list of food selected for VAT reduction and thus determining some goods as luxurious food.
“It seems that even regular breadrolls and healthy fruits and vegetables are luxury items and thus encumbered with higher VAT,” Zsolt Simon of Most-Híd wrote in a memo. “This division is unacceptable. Fico hunts for voters with cheaper bread, but breadrolls are a luxury.”
He recalled that back in 2014, when the economy started to grow, he proposed introducing a 10-percent VAT on all foodstuffs.
“Fico’s government rejected it back then, but now it’s doing an election campaign out of taxpayers’ money,” said Simon.
Martin Chren of the Freedom and Solidarity party believes that VAT should have been cut on all foods arguing that Slovakia can afford this.
Igor Hraško of the Ordinary People and Independent Personalities (OĽaNO) also criticised the list of VAT reduced foods as too narrow while there are missing traditional food in Slovakia like potatoes, cabbage and onions.
INESS think tank analyst Radovan Ďurana points out that when reducing VAT the cabinet has not set a clear target, for example that a family with low income should save €30 monthly due to this measure. Thus it is not clear what the cabinet wants to achieve and on the basis of what it would assess meeting of the target.
“Actually the goal will be defined only afterwards and according to political interest,” Ďurana told the Slovak Radio. “It is a too general and unmeasurable goal to say that we want to reduce prices of basic food.”
The cabinet of Mikuláš Dzurinda introduced the 19 percent VAT in 2004 along with the flat income and corporate tax of the same amount. At that time it replaced the ordinary VAT of 20 percent and reduced VAT of 14 percent. VAT on medicines and books was reduced to 10 percent. The cabinet of Iveta Radičová increased VAT to 20 percent in 2011 while part of the measure was reduction of the VAT back to 19 percent after the general government deficit of Slovakia decreases below 3 percent of GDP. This happened in 2014, but the current Fico government has kept VAT at 20 percent.