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Study: Booze rally to Latvia boosted by 2015 Reform government excise hike

Alcohol for sale at an Alko1000 store in the border town of Valka.
Alcohol for sale at an Alko1000 store in the border town of Valka. Source: (Postimees/Scanpix)

The Estonian Institute of Economic Research introduced its study on the border trade between Estonia and Latvia on Monday. As it turns out, Estonians' recently peaking shopping tourism to Latvia first gained momentum under the previous government, led by then-Prime Minister Taavi Rõivas (Reform).

According to the study, the 15-percent excise hike introduced by Taavi Rõivas' Reform Party government in 2015 was the starting shot of the run on cheaper Latvian products, which first gained momentum in 2016. The excise hike decidedly influenced the price of hard liquor.

This finding of the study is particularly interesting also because one of the sharpest critics of the current Center Party-led government's excise policy, Maris Lauri (Reform), was minister of finance at the time.

The institute's director, Marje Josing, said introducing the study on Monday that early in 2016 prices were still relatively stable, as sellers were reducing their stock. But in the second half of the year, the difference between Estonian and Latvian retail prices began to increase.

State didn't sufficiently consider implications of consumer behavior

The study shows that by now border trade between the two countries is no longer limited to alcoholic beverages, but also includes other products on which the state levies an excise duty, such as tobacco and fuel. For the Estonian state this has meant serious losses, as on top of the lower excise revenue, it is also missing out on VAT and taxes paid by companies.

According to Josing, closely observing price and market developments in neighboring countries is essential for any excise policy to work. "This wasn't done in Estonia," Josing said.

She added that in the state's analyses of how such developments may influence the results of its excise policy, information regarding consumer behavior has so far played far too small a role. At the same time, the situation can hardly be seen as unique, as other countries, including Finland, Denmark, and Germany, are faced with similar problems, Josing said.

The institute's study also includes a description of the typical Estonian crossing the border to go shopping: He is male, 30 to 49 years old, lives in South Estonia or Pärnu, has a good salary, but a lower level of education.

Number of booze shoppers increases by 11 percent from 2016 to 2017

The study also conducted a survey. While in 2016 21 percent of respondents bought booze in Latvia and 79 percent didn't, last year this number was up 66 percent, with 35 percent shopping for alcoholic beverages across the border.

The share of all those who traveled to Latvia specifically to buy alcoholic drinks increased by 11 percent, from 7 percent in 2016 to 18 percent in 2017.

Of the 2017 shoppers, 26 percent hailed from West Estonia, 24 percent from South Estonia, 19 percent from the North, and 11 percent from Central Estonia. Only 1 percent hailed from the Northeast.

While initially the shoppers crossed the border for hard liquor, the most popular drink in 2017 was beer, with wine currently showing an upward trend as well, Josing said.

Estonians buy fuel, tobacco, food, construction materials as well

The study also looked into the influence of stockpiling booze on people's consumption. More than half of the survey's respondents, some 56 percent, said their consumption hasn't increased, while 33 percent said they are indeed consuming more than previously.

In a sense, buying a large amount of alcoholic drink at once has become normal, Josing said. "Every fourth person who went stocked up as well. This is a new thing, that Estonians are stocking alcohol," she added.

The average annual spend on booze of a cross-border shopper was €725 in 2017. Those who crossed the border specially to buy booze spent more, namely €1,070 on average. While in 2016 45 percent of shoppers also bought food, in 2017 this number reached 64 percent.

People are also buying fuel. In 2016, 32 percent of cross-border shoppers also filled up, while last year that number increased to 60 percent. This fits a recent description of the situation by the mayor of the Latvian border town of Valka.

But the shopping spree doesn't end there, as Estonians also buy tools and construction materials in Latvia. 18 percent of shoppers did so in 2016, a number that skyrocketed to 51 percent in 2017.

The survey also brought out that where in 2016 just 18 percent bought tobacco products, in 2017 that number had risen to 45 percent.

The fact that Estonians bought products other than alcohol now as well means that the Estonian state is losing out on VAT revenue. Card transactions alone amounted to €66 million in 2017, with cash payments made also adding to this sum, Josing said. Very rough estimates put the amount of money spent by cross-border shoppers in Latvia last year at some €100 million, she added.

At Estonia's 20 percent VAT, this means that the state lost out on millions and millions of euros in this category as well.

Current trends indicate that the cross-border is set not only to continue, but to increase this year, Josing said.

Editor: Dario Cavegn

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