Who pays for the VAT decrease?

The Hungarian government is planning to decrease the VAT of certain food products. It is just a preliminary idea because the decision depends on impact studies – but we all know that different impact studies always come to different conclusions. According to KSH, in the last twelve months flour prices were up 44 percent, sugar became 28 percent more expensive, we had to pay 19 percent more for cooking oil and the price of milk was up 10 percent. Consequently, consumption has been declining. Farmers and processing companies say production costs increased because of more expensive base material and higher energy prices. In the Ministry of Rural Development experts are examining how the VAT decrease would affect the budget and the economy. In theory, if VAT is reduced prices can become lower too – if there is oversupply on the market and retailers are competing for consumers. It could well be that prices do not decrease when the VAT is reduced and the extra profit goes to retailers, while the budget loses VAT revenues. Actors in the FMCG sector welcome the idea and say they expect higher profits from increased sales generated by lower prices. The government’s plans are said to include poultry and pork but we do not know what else is on the list of basic food products, the VAT of which is planned to be reduced. Experts are still afraid that the VAT decrease would simply make extra profits for retailers, instead of supporting the intended beneficiaries: farmers and consumers.