The new fiscal package, which provides for VAT on food products to be reduced to 6%, but also for the standard VAT rate to be raised from 20% to 21%, is expected to bring changes to the burden faced by businesses and citizens. Economics expert Eduart Gjokutaj describes the package as an unexpected initiative, which in his view was also prompted by social pressure and protests.
What is your main impression of the whole fiscal burden package, which is certainly loaded with figures and details? What impression does it leave on you?
Eduart Gjokutaj: This package that was proposed caught by surprise businesses, the group of experts, and the general Albanian public alike. Just a few days earlier, in line with the revenue strategy, the political program of the governing Socialist Party, and the medium-term budget program, no increases or changes in tax rates were foreseen, only an improvement in administration following the IMF’s recommendations to remove tax exemptions and for a fairer distribution of the fiscal burden. Although it is said that we have a more evenly distributed fiscal burden, in fact the fiscal package itself seems to be driven by the protests. So it seeks to accommodate the growing social pressure through fiscal management, and all of this is reflected mostly in the VAT law.
What stands out in general, even to a non-expert eye, is that there is a VAT reduction on food to 6% (it was 20%), but an increase in the general VAT rate from 20% to 21%. Is the balance for the state treasury here the increase of 1% and the reduction of 6% on food? Is this the key to understanding this whole mechanism or not?
Eduart Gjokutaj: According to the whole analysis of the package, naturally driven by the decision for a social policy, which in fact is not social policy through taxes, but the government has considered it reasonable to do so, because of the reduction of VAT on food products, which according to the Ministry of Finance’s calculations has the greatest negative effect, other measures will be taken. The budget is arithmetic, so measures have been designed that raise the standard VAT by 1% to neutralize the losing effect, and corporate profit tax is raised by 2% for large businesses. Albanian businesses will pass this cost on to prices. Meanwhile, it is thought that social strata will benefit from the VAT on food, but high informality hinders the full transmission of this reduction. On the other hand, the commitment to businesses not to raise taxes until 2029 and the lowering of the VAT threshold imply businesses’ freedom of decision-making. All of these may undo the VAT reduction on food, since businesses will pass their costs on to other products and services. The result will be that citizens will not feel this relief, just as happened with the fall of the euro, which was absorbed into businesses’ profit margins.
From this proposed package, who emerges as the most harmed and who are the ones being spared?
Eduart Gjokutaj: Those being spared are presumably the category of those who do not have sufficient income, i.e., those who spend up to 40% of the family budget on food. However, it is doubtful whether this will reflect on them. The main losers are large businesses (over 14 million lek in turnover), due to the 2% increase in corporate profit tax, the increase in the tax on dividends, and the 1% increase in VAT. Meanwhile, the one who wins in any case is the state budget, which expects to net 10 billion lek from these measures.