‘The Postedia’ spoke with Presidential Advisor Vaidas Augustinavičius about rising food prices, possible VAT relief, second pillar pensions and tax reform.
– Recently, in the public space, the presidency mentioned both stage II of the accumulation of pensions and the possibility of reducing VAT on food products. What general situation does the presidency see today in relation to food prices?
– The President notes that the problem of food accessibility remains in Lithuania. We can see that last year food price inflation was several times higher than wage growth. Food prices have increased by 20-30% in some months.
This year, the growth in food prices is still higher than that of wages. In June, the annual growth of food products reached about 14 percent. <...>
Last year’s macroeconomic data show that the level of food prices in Lithuania has exceeded the general income level of the state’s population, and all indicators show that the problem is very serious and it is necessary to take measures.
The president and his team see governments in other countries taking action. The French government has entered into agreements with retail chains to minimize the prices of essential food products and this practice has proven to be successful. Social contracts concerning the minimization of the prices of the most necessary products have been concluded with 75 food producers.
The UK is trying to follow France’s lead and in general we see that deep market economy countries are trying to tackle this problem with proactive actions by governments.
Lithuania is one of the two or three countries in the EU that do not have a VAT exemption for food products. Recall that before the elections of this Parliament, the members of the Homeland Union – Christian Democrats proposed a reduction in VAT for food products and the government to conclude a memorandum with the distribution chains.
Now is the time to deliver on that promise as we see the problem of food affordability worsen. It would be a good time to implement it and the president encourages it. <...>
It is necessary to follow the practice of good countries and to tackle this problem intensively. For the government to seek some agreements or regulation of surcharges, or consider VAT relief for most needed food items.
– Should VAT relief be long-term and what would the presidency propose?
– We see that the French have concluded agreements with distribution chains for 3 months, then extended them. In Romania, increases are also limited for 3 months.
3-6 months is probably the period during which the remedy can be effective. This would allow residents to breathe a little, and their incomes could more easily catch up with rising food prices, which have lagged behind.
The president would suggest that the VAT relief be applied to the most essential groceries, as this is the most relevant basket for people on low incomes. <...> Other countries have lists of products to include. <...>
The Presidency has formally requested the Ministry of Finance, Ministry of Economy, Ministry of Agriculture and Government to take a closer look at practices in other countries by the end of August , and what the model might look like if the preferential VAT regime was reduced to 9%. and there would be agreements with traders, or if there was a mark-up scheme.
– Has the impact this would have on the country’s budget revenues been assessed? Less funds would be raised for this.
– We will see the calculations in the answer of the Ministry of Finance, but as we know from previous discussions, the measure is not cheap. However, given the magnitude of this problem, namely that people spend perhaps the most on food in the whole of the EU, this social measure would be justified in terms of priority, because food must be affordable for the population. and, therefore, people don’t have to be poor to buy it.
On the other hand, it would cost money. You should look at the overall budget. The measure for six months would cost more than ten, maybe even about 100 million. Eur, but here you have to look at what the basket itself would be. It would be rational not to expand it too much, but to make it manageable and easy to administer.
– Many criticisms were expressed that traders would “eat” the price difference and that prices would not drop after the VAT reduction.
– In France, such protocols are concluded between the State and the commercial sectors, manufacturers. In Romania, legislation establishes maximum margins for the most essential food products.
These instruments, which are applied in other EU countries, could help to ensure that the temporary reduction in VAT reaches the consumer. <...>
– Another Presidency proposal concerned the second pillar of pensions. The presidency proposes to authorize the withdrawal of a quarter of the amount accumulated in Tier II once in a lifetime. What result do you expect? Will it encourage residents to participate in Level II?
– We rely on the practice of foreign countries and see the situation that has developed in Lithuania. Surveys show that 9 out of 10 residents are dissatisfied with the Tier II retirement model. Figures also show that around 60 percent of residents asked to save for retirement refuse to do so and reject the model.
From the state’s perspective, this is a clear signal that a response and amendment is needed. In other countries, it is possible to withdraw part of the funds. It is like an additional liquidity tool that residents can use in the event of a complex illness or financial crisis. <...> We don’t have that in Lithuania.
The OECD pointed out that such incentives would help and increase the attractiveness of Tier II pensions, encourage more residents to save in this system, as it would become more attractive due to the possibility of withdrawing part of the funds at the advance.
At the moment, residents believe that their funds in pension funds are blocked. This should be changed by establishing the right to withdraw part of the funds earlier. In no Western European country has the system collapsed simply because it is possible to withdraw part of the funds. On the contrary, the attraction of level II only increased.
– However, don’t you think that the majority will withdraw the mentioned money and the Estonian scenario will repeat itself, when the money was not spent on investments, but on consumption?
– in 2019 residents had the opportunity to leave the pension level, but the pension system remained, the levels remained, but practice shows that the system is currently imperfect. <...>
– There is a lot of discussion about the marking of goods of companies still active in Russia in Lithuania. How would the presidency see such an idea? Would you support him?
– The Presidency thinks it is a good idea. These are questions of value and we believe that the population should have the right to know whether the goods they buy, the companies that sell them, contribute to the financial contribution of the regimes of Russia or Belarus by the payment of taxes.
Of course, the implementation of the system is very important here, so there are no legal obstacles. There is currently a debate about how this might happen. A certain interagency model could be activated, where certain publicly announced lists of vendors tied to paying taxes to abusers could be established, and commercial networks would use this information.
– Tax reform will be one of the most relevant topics of the fall. Who interferes with the presidency?
– For many years, we are witnessing perhaps one of the greatest tax reforms in terms of complexity and scale, but at the same time, when it is so extensive, there are certainly both good things and things that need to be significantly improved.
The president is in favor of more progressivity in the tax system. There is an option offered for high earners to be taxed regardless of the form in which they are received.
It is also a good thing that tax reform includes investment incentives. <...>
The big downside is that tax reform codifies that the tax burden will increase for low- and middle-income self-employed people. This place can be greatly improved because the tax burden of low and middle income people should not increase. Now, the tax reform provides that if a person receives EUR 1250 before tax per month, his tax burden increases.
What is also missing is that the tax reform takes into account the fact that the taxpayer is raising children. There is a lack of incentives for individuals and families to work and raise children.
There was a promise from the government, included in the program, that the tax reform should take into account the so-called number of dependents. There is no measure in the reform itself, but the president proposes the idea of creating an additional amount of non-taxable income (PNPD) for children, which could reach 87 euros.
This measure will create losses in the budget, but they could be covered if the high income progressivity proposals were enshrined. If a person raises two children and earns the minimum wage, if such a person establishes the PNPD, his total non-taxable amount would be equal to the MMA the following year.
Source: The Delfi