A citizen initiative to lower the value-added tax on food has gathered nearly 80,000 signatures, making it the most popular public initiative in Estonia to date. Politicians, however, remain divided on whether the VAT on food should be reduced.

The Center Party, the Conservative People's Party of Estonia (EKRE) and the Social Democrats have publicly supported the reduction. Finance Minister Jürgen Ligi of the ruling Reform Party, on the other hand, recently stated that lowering VAT would be of little use, as the benefit would not be reflected in final prices but would instead be absorbed along the supply chain.

According to Rasmus Kattai, an economist at the Bank of Estonia, there is no clear pattern showing that countries with higher VAT rates on food necessarily have higher food prices.

"If anything, the correlation actually goes slightly in the opposite direction — it seems that in countries with higher VAT rates, food tends to be a bit cheaper. But of course, that doesn't mean that raising the tax rate would somehow make food cheaper," Kattai said.

"Each country is shaped by many different factors and is unique in its own way. We need to consider things like the level of market competition, the size of the market, the structure of the distribution network, the standard of living and the nature and cost structure of the retail sector," the economist explained.

At the same time, academic studies have found clear evidence that lowering VAT can affect food prices. One study published in February, for example, showed that when Poland eliminated its 5 percent VAT on food three years ago, prices dropped by nearly 5 percent within five months.

A similar study from Germany found that 70 percent of the maximum potential price drop was passed on to consumers at the retail level.

Kattai noted, however, that a separate question is how long any initial drop in prices would last. He pointed to the example of neighboring Latvia, where VAT was also reduced for domestically produced food products.

"When we compare food prices in Estonia and Latvia within the same product groups where Latvia has a lower VAT rate, it hasn't resulted in cheaper food for Latvians. So, as I said, there are many different factors that determine how much of a VAT reduction actually reaches consumers," Kattai said.

In an interview with Õhtuleht, businessman Oleg Gross attributed Estonia's high food prices to the country's peripheral location — "a far corner of Europe" — which makes transporting goods expensive. "Plus tax policy. Plus a small market. In short: geographically the wrong location, a small market and cruel economic laws."

According to Gross, Estonia's economy is overregulated. "The state's role should be to tax reasonably and let the economy function freely. Of course there need to be some laws, but not excessive taxation, overregulation, prohibitions, favoritism or meddling in everything. The less the state interferes and taxes, the better the economic outcomes will be. A free market will regulate itself," he said.

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