Reduced VAT on Food: First Results but Experts Warn of Challenges
Since July 1, the reduced VAT rate on four food groups has boosted sales of dairy and chicken, but experts caution about budget revenue loss and global price risks.
The reduced value-added tax (VAT) rate introduced on July 1 for four food product groups in Latvia has already shown initial results. According to the Latvian Food Retailers Association, demand for dairy products and chicken meat has increased. Retailers emphasize that the transition to the new system went smoothly, as the sector prepared in advance.
Meanwhile, consumers are increasingly asking why the reduction applies only to a limited range of products. Industry representatives suggest that expanding the reduced rate to other items should be considered in the future.
However, experts warn that lower VAT cannot fully shield consumers from global market fluctuations. Oļegs Krasnopjorovs, an economist at the Bank of Latvia, notes that if food prices continue to rise internationally, Latvia will also feel the increase, albeit to a lesser extent. He stresses that long-term economic growth and rising household incomes are key, as prices in Latvia remain high.
Estimates indicate that the reduced VAT will result in approximately €32 million in lost budget revenue. Economists suggest this shortfall may need to be offset by raising other taxes or increasing VAT on goods not covered by the relief.
The food industry is more optimistic, arguing that the money saved will circulate back into the economy, as consumers spend it on other purchases or daily needs. The reduced rate is set for one year, but retailers are already pushing to make it permanent and extend it to a wider range of products.
