Nele Peil, CEO of the Estonian Retailers Association, told ERR that the level of value-added tax in Estonia is so high that it has exceeded people's pain threshold.

"Food sales volumes in Estonia's retail sector have been declining for four years now as people can no longer afford to buy food. We have looked at what would be a realistic proposal given Estonia's current budget deficit — one that would be financially manageable for the state and help people. Lowering taxes on essential food items would be a win-win scenario: the most favorable for the state and with the lowest administrative burden," Peil explained.

She added that in such a case, the state would not need to create any measures or administer subsidies itself as the entire administrative burden would remain with the private sector.

According to Peil, the share of local products is highest within the essential food category, meaning that increased sales driven by a VAT reduction would also benefit domestic food producers.

"In retail, these categories have the smallest markups and the highest price competition, meaning the impact of a tax cut would be passed on to prices in full or near-full," Peil forecasted.

She also noted that these categories contain the healthiest goods — excluding processed or salty foods, sugars and fats — and instead consist of fresh and essential items such as fruits and vegetables, bread, fresh meat, milk and eggs, which are unavoidable expenses for consumers.

"It seemed the most responsible and reasonable category for making such a proposal," Peil said.

In its campaign materials, the association points out that a €100 food basket in Estonia would cost €86 in Germany where VAT on food is 7 percent.

According to Peil, all retail chains support the idea of lowering VAT on essential food items, though the current campaign includes Prisma, Rimi, Selver and Coop.

Most EU members have far lower VAT rates on food

Kertu Kärk, communications manager at Prisma, said the company decided to join the initiative because stores see every day how strongly price pressure affects people's food purchasing choices.

"More and more, food is being bought only at discounted prices and many families are planning their purchases very carefully to keep everyday expenses under control," Kärk said.

She added that although food prices in recent years have been driven by rising input costs — energy, logistics and labor — as well as a higher tax burden, lowering VAT on food products would be the fastest tool to bring prices down.

Rainer Rohtla, chairman of the management board of Coop Eesti Keskühistu, said this week on the "Terevisioon" morning show that food prices in stores are now 40 percent higher than they were three to four years ago. In almost all other European Union countries, food benefits from a reduced VAT rate; besides Estonia, only Denmark and Lithuania do not apply such a measure.

However, VAT in Lithuania is lower than in Estonia, while in Denmark it is one percentage point higher — 25 percent — but the average income there is nearly twice as high as in Estonia.

"We should in any case consider lowering VAT," Rohtla said. "Today, when our food basket is 110 percent of the EU average and we have one of the highest VAT rates on food in Europe, I believe it is high time to do so."

Kärk noted that the campaign aims to draw attention to how tax policy affects people's everyday food baskets and to open a discussion on solutions that would help make food more affordable.

"We also believe that, under conditions of strong competition, the impact of a potential VAT reduction would be reflected in prices because Estonian consumers monitor the cost of their shopping baskets very closely and retail chains cannot simply absorb such a change without passing it on," she said.

The central tool of the current campaign is the website kaibemaks.ee to which advertisements direct viewers. In addition, the campaign includes digital screens and ads in stores, as well as radio advertising and social media outreach.

According to Nele Peil, the Estonian Retailers Association has also tried to discuss the VAT reduction idea with Finance Minister Jürgen Ligi, but the minister has so far not found time to meet with them.

The current campaign will run until the second half of April, but the association plans to continue addressing the issue until the next elections.

"There is very broad public support for this," Peil said.

Finance minister slams initiative as unseemly

Finance Minister Jürgen Ligi (Reform) described the merchants' initiative as a brazen and low tactic to pressure money out of the state budget, despite benefiting from what he called a highly competitive tax system. In his view, VAT exemptions do not significantly translate into lower end prices for products.

"The highest food prices in Europe are found precisely in countries with low VAT rates. For example, in Ireland and Malta the rate is zero, yet food there is more expensive," Ligi said. "So in any case, this is misleading. They say outright that without VAT, goods would be cheaper. Statistics show that VAT exemptions tend rather to be accompanied by higher prices and also a higher overall tax burden."

Ligi explained that any such tax cut would have to be compensated elsewhere. Estonia's budget is deep in deficit and the state should focus on the optimal use of tax revenue rather than on prices.

According to the finance minister, a VAT exemption on food would benefit more those buying caviar than those buying soup bones. Ligi also attributed high food prices in part to an oversupply of retail space, which requires stores to employ more staff and expand logistics — costs that, he said, should not be covered by the state budget.

Ligi said he was not aware that the Estonian Retailers Association had sought a meeting with him on the VAT issue, but added that he would be willing to present them with statistics and arguments.

"I know opinions about me have been expressed in public, but they never respond to my arguments with arguments. They always turn personal or populist. This same in-store campaign targeting all shoppers is not actually argumentation because the claim that removing VAT would make food cheaper is a deception," Ligi said.

The finance minister added that the government provides public services that cost money and those whose salaries are paid from VAT revenue include rescue workers, police officers, teachers and medical professionals.

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