The VAT on food was reduced in 1996 in order to enhance the purchasing power of low-income earners and families with children. The audit of the Swedish National Audit Office indicates that other measures can achieve the same result – at half the cost. Thus, the measure is not cost effective.
In the spring of 1995, the benefit levels in several of the social security systems were reduced in order to cut expenditures in the public sector and stabilize the country's economy. To compensate families and low-income households, the VAT on food was reduced to 12 percent in 1996. The idea was that this measure would especially benefit low-income households and families with children, because they use a relatively large proportion of their household budget to buy food.
The value added tax on food is still 12 percent, instead of the standard tax rate of 25 percent. The resulting losses in tax revenue to the State total nearly 30 billion SEK.
In its audit, the Swedish National Audit Office noted that the reduction in VAT led to a corresponding reduction in prices in the stores, but that it is not an accurate measure and therefore not a cost effective way to increase the purchasing power of families with children and low-income households.
40 percent of the reduction in VAT goes to groups other than families with children and low-income earners. The desired effect is thus quite small relative to the effect on public finances, says Auditor General Ingvar Mattson.
The calculations of the Swedish National Audit Office also indicate that when one measures in SEK, households with the highest incomes and households without children benefit most from the reduction in VAT on food.
It's only when you measure purchasing power gain as a percentage of the households´ equivalised disposable income that the reduction in VAT particularly benefits families with children and households with low incomes, says Peter Johansson, the project manager for the audit.
To investigate whether the desired effect (that is to say, enhanced purchasing power for families with children and households with low incomes) can be achieved by more cost effective means, the Swedish National Audit Office conducted simulations of other possible measures.
These simulations show that combinations of increased child allowance, large family supplement, study allowances, financial assistance and housing supplements would give families with children and low-income households the same purchasing power gain as the reduced VAT, but at half the cost.
If the motive of the reduced VAT still is to support families with children and households with low incomes, the Swedish National Audit Office recommends that the Government consider whether these groups should be supported in other ways. However, the Swedish National Audit Office does not take a position on whether the VAT on food should be raised to the standard rate of 25 percent.
The simulations are illustrative examples and should not be construed as proposals for action. The fact that the reduction in VAT does not effectively achieve its purpose does not mean that an overall assessment will not indicate that it entails other benefits that the Riksdag might wish to retain, said Ingvar Mattson.
* Defined as households with no more than 60 percent of the median income.
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