Triinu Tapver: The effect of lowering VAT on foodstuffs is short-lived

TALLINN - The experience of other countries shows that the effect of lowering the value-added tax (VAT) on foodstuffs is predominantly short-lived and does not turn into the lifeline it is hoped to be, said LHV macro-analyst Triinu Tapver at the 20th anniversary conference of the food industry.

The food sector is most affected by the geopolitical situation, rising raw material prices, supply chain uncertainty, growing demand in developing countries, competition from other regions, weather, and demographic changes. Prices for most commodities, including grain, meat, sugar, and vegetable oils, are rising again, and the cost base for companies remains high.

"Growing demand on the world market creates opportunities for export, but at the same time, geopolitical tensions, fluctuating energy prices, and regulatory pressure from the European Union increase uncertainty throughout the sector," Tapver said.

According to LHV's forecast, the Estonian economy will grow by 1.9 percent this year, but the operating environment for the food industry remains tense. Since 2019, prices for food and non-alcoholic beverages have increased by nearly 64 percent, while the gross wage has risen by 46 percent and the net wage by even less, at 34 percent. This means that the increase in food prices has outpaced income growth, and consumer purchasing power has not yet recovered to pre-crisis levels. LHV estimates that Estonia will only return to the average purchasing power level of 2020 by the end of 2027, provided that price growth does not accelerate again.

Although wage growth is expected to slow to around five percent this year, stronger pressure on labor costs will persist in the lower wage deciles. This means the pressure on the cost base for food producers will not disappear. The sector's cost structure has also shifted, with the share of raw material costs increasing significantly. The sector's profitability has fallen from 4.85 percent in 2015 to four percent. Estonia's small domestic market and slowly recovering purchasing power mean that future growth will increasingly depend on the ability to compete in foreign markets.

European Union regulations increase the administrative burden on companies, especially for smaller producers. However, they can also become a competitive advantage for businesses that can adapt quickly and use regulatory requirements as a mark of quality when entering the European market.

"The next few years will not be easy for the food industry, but companies that can invest in efficiency, grow exports, and manage risks systematically will be able to emerge as winners from this environment," Tapver added.