"I conveyed this to her during the very first government meeting: she should not deal with something that has already been thoroughly examined, should not waste money, should not make noise and should not raise false hopes. Yet, here she is pursuing it again, and the state is footing the bill for something she perfectly well knows about." This was how Finance Minister Jürgen Ligi (Reform) recalled his conversation with Minister of Regional Affairs and Agriculture Piret Hartman (SDE), whose aim is to evaluate the feasibility of reducing the VAT rate on food products.

"At the moment, the finance minister has been skeptical about this proposal. I respect and accept all differing opinions, but we can debate these issues only when we have our own arguments and sufficient analysis to back them up. Today, I do not see the point in holding a substantive debate about who likes what or how we ideologically view tax policy as a whole," Hartman explained.

The Ministry of Regional Affairs and Agriculture has been approached regarding VAT relief on food products by the Estonian Chamber of Agriculture and Commerce as well as retail chains. According to Hartman, their shared concern is that food prices are exceptionally high, and people's willingness to purchase domestic Estonian food products has declined.

"When prices are more reasonable, people have more choices. Estonian food is of very high quality – clean and fresh – but the prices are so high that people have no real choice, and Estonian consumers are very price-sensitive," Hartman described.

She added that the Rural Development Research Center is currently preparing a study. The aim is to determine whether adjusting the VAT rate is reasonable, for which food products and by how much.

"We hope to have answers by spring so that when state budget negotiations begin in the fall, we will have the necessary materials prepared, the proposals ready and can move forward," Hartman stated.

But the finance minister has been openly irritated by the entire matter.

"Piret's decision to commission this study and take on the issue herself is, of course, a highly incompetent step. That ministry has no expertise in state budgets or tax policy. Furthermore, there is nothing to study – these impacts have already been thoroughly analyzed and they are highly predictable even from a theoretical perspective. The fact that some interest group is asking for this does not justify her switching areas of responsibility and spending state funds on it," said Ligi. He pledged to discredit the study in government discussions if it concludes that reducing VAT on food products is a reasonable step.

Hartman acknowledged that smaller-scale analyses have indeed been conducted previously by the Ministry of Finance, but said the Ministry of Regional Affairs and Agriculture is now taking a more comprehensive approach.

"The Ministry of Finance is ultimately the one responsible for preparing tax policy changes, but of course VAT has a significant impact on food products and the entire agricultural sector. That's why we see it as necessary to do this preparatory work on our side, so we can even begin negotiations with the Ministry of Finance," Hartman explained.

According to Ligi, both theory and previous studies indicate that reducing VAT has little effect on food prices, and any savings would not significantly reach consumers. Instead, the primary beneficiaries would be wealthier individuals, further exacerbating inequality. Additionally, the state would lose €400 million in tax revenue, which cannot be offset elsewhere in the budget.

"Even the Food Industry Association recently said, 'We don't want a VAT reduction on food because we know that other taxes will rise more as a result,'" the finance minister noted. "Of course, people tend to blame government taxes for high prices, but in reality, those taxes are what help address social issues. In this case, such a tax cut would not enhance economic efficiency in any way."

Hartman acknowledges that lowering taxes is indeed challenging from a state budget perspective. However, she argues that the Ministry of Regional Affairs and Agriculture must consider more than just budget balance – it must also ensure that food prices remain reasonable, that Estonian agricultural producers can sustain their operations and that the country maintains food self-sufficiency in the future.

"We need to address these issues. Simply adopting the principle of not changing anything for the sake of keeping things unchanged is not a way forward," she emphasized.

The tax break should go beyond a few percent

Piret Hartman noted that during discussions with retail chains, the question of whether store prices would actually decrease following a VAT reduction was raised. Retailers reportedly assured her that due to market competition, there would be no other option but to lower prices.

"One clear takeaway from these discussions is that a minor percentage difference is not worth pursuing. This was also the message from retail chains – that any change must be a significant decision. In Latvia, for example, the VAT difference for vegetables is just a few percentage points. And indeed, whether in autumn or spring, these price differences are not always noticeable," the minister of regional affairs and agriculture explained.

Finance Minister Jürgen Ligi countered by emphasizing that hunger is not an issue in Estonia and that poverty indicators have begun to improve.

"This is nonsense, as though food choices depend solely on price. In reality, very healthy food is often quite affordable. For instance, the poorest individuals frequently consume VAT-free goods obtained through subsistence farming in rural areas. They don't gain anything from a VAT reduction – they don't get tax savings from planting their own potatoes. The old truth remains: addressing social issues through tax policy is highly inefficient," Ligi stated.

He added that Minister Hartman should focus instead on educating people, as the main challenges lie in obesity and food quality. According to Ligi, eating both cheaply and healthily requires appropriate knowledge.

Estonia loathe to follow Europe's example

One of Piret Hartman's arguments in favor of lowering VAT is the practice of similar policies elsewhere in Europe. She cited Germany, where the standard VAT rate is 19 percent, but food products are taxed at just 7 percent, with discussions currently underway to reduce it further to 5 percent.

Economist Raul Parts also referenced international practices, highlighting in an opinion piece published on ERR last summer how Estonia persistently ignores economic policy tools employed elsewhere in Europe.

"For a long time, we've operated under the belief that various tax exemptions are inherently bad – whether it's VAT relief for food products or tax incentives for specific business sectors. There's an unspoken dogma here that we have a blunt and rigid tax system. While this approach might have been justified in the 1990s under the governments of Mart Laar and Tiit Vähi, the world has since moved on. Our European partners are using tax exemptions, and they are demonstrably effective," Parts said.

Parts compared Jürgen Ligi's rhetoric to statements from Prime Minister Kaja Kallas' (Reform) government during the energy crisis, when it was argued that direct financial support to address high heating, gas or electricity prices would not work.

"Those claims have simply proven to be false. European experience clearly shows these measures work. They helped other countries curb inflation and left people with more money in their pockets. I believe the same logic applies to VAT relief on food products. It cannot be that we are the only ones who know this is nor right while everyone else is supposedly getting it wrong. Why doesn't Jürgen Ligi pick up the phone, call his European counterparts and tell them, 'Don't you understand this is a bad idea?'" Parts argued.

He added that any measure helping ordinary citizens right now, even if it results in a 5 percent price drop for some food items, is still a win. Responding to the finance minister's concerns about a €400 million shortfall in tax revenue, Parts said that leaving more money in people's pockets through reduced VAT wouldn't just sit idle – it would go into consumption.

"This might sound like an exaggeration, but maybe someone could then afford a loaf of bread they otherwise couldn't. We must consider these social aspects in our country, not just focus on what revenue or expenses show up in a budget line or spreadsheet."

Jürgen Ligi dismissed the relevance of comparisons to other countries, stating, "Every country has the same chatter about caring for the people. In reality, enormous sums are spent inefficiently. It barely affects prices, the state forfeits its tax revenue and then has to raise other taxes to compensate."

--

Follow ERR News on Facebook and Twitter and never miss an update!