Person food shopping

Cost of living crisis: what the government is doing to restore “stability and confidence”

The Portuguese government has announced a list of 44 essential food products which will benefit from a new ‘Zero VAT’ scheme starting in April. The goal is to address the rising cost of living in Portugal, which has seen supermarket prices reach unprecedented levels, and succeed where a similar scheme in Spain has failed.

The scheme will last for a period of six months (from April to October) and is part of a larger package of measures to tackle inflation which will cost the government around €640 million. The package also includes 1% wage increases for civil servants, a €30 monthly handout for “vulnerable families” and €140 million in support for the country’s agri-food sector.

As Finance Minister Fernando Medina said at the announcement of the measures last week, the goal is to create “stability and confidence” and “end the fear of not knowing if one day you will reach a shelf (and see) a higher price than you found the day before.”

The list of products benefitting from a 0% VAT rate are: bread, potatoes, pasta, rice, onions, tomatoes, cauliflower, lettuce, broccoli, carrots, courgette, leeks, pumpkin, turnip greens, ‘Portuguese cabbage’, spinach, turnip, apples, bananas, oranges, pears, melon, red beans, black-eyed peas, chickpeas, peas, cow’s milk, yoghurts, cheese, pork, chicken, turkey, beef, codfish, sardines, hake, mackerel, canned tuna, seabream, horse mackerel, chicken eggs, olive oil, vegetable oil, and butter.

The measure was being discussed in Parliament on Wednesday, as the Resident went to press, and is due to be voted on April 6 – its approval is a formality as the Socialist Party has a majority number of MPs.

It will only come into effect after it is approved and published in the Diário da República state newspaper – in other words, sometime around mid-April.

Portugal is looking to prove that this kind of measure can actually work, as a 0% VAT scheme introduced in Spain at the start of the year has proven mostly unsuccessful.

The list of products included was much smaller (just 11) in Spain, and certain items such as pasta and olive oil, which will become exempt from VAT in Portugal, saw their VAT rates reduced from 10% to just 5% in Spain.

Spanish shoppers also noticed little to no difference in prices, which continued to increase regardless of the measure due to a lack of any concrete agreements with the food distribution and production sectors.

According to Spanish press, prices skyrocketed for a series of food products between February 2022 and February 2023, including sugar (+52.6%), sauces and seasonings (+33.8%), olive oil (+33.5%) and milk (+33.2%).

Comisiones Obreras, one of Spain’s most influential union confederations, admitted in March that the VAT exemption “was not having an effect” and that “more effective measures” were needed to limit the effect of inflation on the prices of these essential products.

This is what government officials are promising will be different in Portugal, where the measure was created with the input of the two sectors. In fact, the government signed a pact to this effect with the Portuguese association of retail distribution companies (APED) and the confederation of farmers of Portugal (CAP) on Monday.

In other words, Portuguese shoppers who were accustomed to travelling to Spain for a cheaper shopping experience may soon find that the trip will no longer be worth it.

The decision to axe VAT on essential food products is just one of a package of measures announced by the government last week. Civil servants are due to receive a 1% increase in their wages as well as raises to their meal subsidy, while families facing financial struggles are expected to begin receiving a €30 monthly subsidy from the government.

State support has also been announced for the agricultural and food production sector, which will receive a €140 million aid package.

These measures will not come cheap, costing the government’s coffers around €640,000 million in just six months.

So said prime minister, António Costa, at the pact signing ceremony on Monday.

“It is obviously a very large effort for a programme that has a six-month horizon,” said Costa, stressing that the government will monitor the impact of the measures for the coming six months.

He also guaranteed that the pact signed between the government and APED and CAP guarantees that the VAT reduction will be reflected on the prices charged to consumers and highlighted the importance of the €140 million support package for the agri-food sector, which has been hit by increases to fertiliser, feed and energy costs.

Regarding the other measures announced, over 742,000 civil servants are due to receive a 1% raise starting in April. Público newspaper has stressed that the measure won’t be applied retroactively, meaning it will only be applied next month. Meal subsidies are also increasing 15.4% to €6 a day.

The new €30 monthly subsidy for “vulnerable families,” on the other hand, is expected to be paid in four instalments – April, June, August and November. An additional €15 per month will be added per child.

Also read: Young workers protest against cost of living, low wages

By Michael Bruxo
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