Poland increases VAT

2010-08-06

The Polish government has adopted a new financial plan which will raise standard VAT by 1 p.p. to 23% for three years. A higher VAT rate will be introduced in January 2011. The tax on non-processed foodstuffs such as grains, fruit and vegetables, herbs, milk, eggs and fish will increase from 3% to 5%. On the other hand, VAT on processed food such as cold meats, juices, bakery goods, yogurts, frozen fruits and vegetables, butter, pasta and chocolate will be reduced from 7% to 5%. In turn, VAT on pharmaceutical goods, apartments, water and sewage services will be increased from 7% to 8%. Moreover, VAT on clothing, furniture and children goods will be increased to 23%.
Market analysts cannot agree whether or not higher VAT will increase food prices. Some experts claim that retailers will reduce their profit margins in order to keep low prices and to avoid losing customers, whereas others believe that higher VAT on services such as logistics and energy will result in increases in food prices.

A rise in VAT is the simplest way of raising extra revenues for the budget. Although such a move is in line with current European trends (Poland is the 12^th EU country to have approved a VAT rise since the crisis began), it is not a growth-stimulating measure (it dampens consumption at a time when consumer spending is crucial to putting the Polish economy back on a path of rapid growth; it also hurts business competitiveness). It is worth noting that although the size of the increase is not very big compared with other countries, Poland’s basic VAT rate is already one of the highest in the EU.
Furthermore, despite its undisputed fiscal effectiveness, a rise of such modest size is merely a short-term solution that will fail to solve underlying fiscal problems. According to government estimates, it will raise only PLN 5-5.5bn (€1.25-1.4bn) in additional budget revenues next year (in 2011 the funding gap is to be closed partly thanks to high revenues from privatisation). Unless the economy accelerates sharply in the following years, the government will be forced to exercise the option of further VAT increases while being unable to avoid spending cuts as well.
The rise in VAT will not be without its impact on prices, although its modest scale means the resulting acceleration in inflation in 2011 should be moderate.


Paweł Sionko
Senior Economist
PMR Publications