Higher tax might blacken the food market

The latest government measures are certain to have a rapid and deep effect on the food supply chain. The combination of reduced purchasing power and higher VAT will transform food retail. As a result of a drop in purchasing power, substantially lower food inflation is expected by analysts in 2009 than in 2008. This is only to be modified by the increase in VAT planned in July. The average VAT rate for food is expected to be 23,5 percent. The 18 percent VAT to be applied to some products will only compensate one-tenth of the increase in spending resulting from the 5 percent higher VAT applicable to most foods. The position of the food industry continued to deteriorate in 2008 and has become critical since then. Production has dropped by one-fifth since 2002, while domestic sales have dropped by a quarter. Production was down by 4,5 percent in the first two months of 2009, compared to the same period in 2008. Pre-tax profits generated by the food industry totalled HUF 115 billion in 2002, while these were only HUF 21 billion in 2007 and even less in 2008. Export is expected to be around last year’s level owing to the weakness of the HUF, while domestic sales are expected to be 2-3 lower. Even companies like Gyulai Húskombinát and Herz Szalámigyár Zrt have found themselves in an extremely difficult situation. Many loan agreements have been terminated or converted into short-term financing by banks. New financing has become extremely difficult to obtain. The government has accepted a HUF 30 billion package of guarantees to be granted by MFB, intended to help food processing enterprises with their liquidity problems. MFB would provide a guarantee for 80 percent of the amounts borrowed, which would allow a total amount of HUF 37,5 billion to be lent. Agricultural production is expected to be lower this year than in 2008. While the weakness of the HUF is good for export, the so called top-up portion to be added to EU subsidies from local sources is to be reduced by HUF 33 billion. The structure of foreign trade is unfavourable with mainly unprocessed products exported and processed products imported. The weakness of the HUF will help retailers in meeting the obligations undertaken in the Code of Ethics recently accepted but this is to change as soon as the HUF begins to recover, with the market share of imported food exceeding 30 percent after 2010. The amendment of tax regulations has been a rude interference with market processes. The introduction of a 18 percent VAT rate for some basic foods is regarded by ÉFOSZ as an insufficient measure. ÉFOSZ has recommended that the number of food categories subject to the preferential VAT rate should be radically expanded. ÉFOSZ has also reminded the government that even the 20 percent VAT rate has resulted in boosting black market activities regarding a number of basic foods. The 25 percent VAT rate which is unprecedented by international comparison is expected to give a further boost to illegal activities. In the opinion of ÉFOSZ, food production should be regarded as a strategic sector. Retailers are not certain that the government will succeed in reducing the deficit of the budget by higher taxes. Originally, the government expected to generate extra revenues of HUF 100 billion in 2009 by a 3 percent rise in VAT. The 5 percent rise is probably the result of a bigger than foreseen drop in consumption. ÉFOSZ and OKSZ agree that higher VAT will drive enterprise toward tax evasion and illegal trading. Spending by pensioners accounted for 51 percent of retail sales of FMCG products in 2008. As a result of the 13th month pension being taken away, pensioners will be forced to reduce their spending on food.