The government and Sverigedemokraterna want to halve food VAT, cutting it from twelve to six percent in April next year. In a recent segment on Swedish Radio, Lars Jonung, Professor Emeritus of Economics at LUSEM (the Lund University School of Economics and Management), was interviewed about his reaction to the proposal and its impact on consumers.
“For me as a researcher, this is an excellent illustration of a historical pattern,” says Lars Jonung.
He explains that food prices have always been at the center of political debate. He recalls the Roman Empire, where “bread and circuses” were crucial for keeping the people content. According to Jonung, the same logic applies today.
“What we are seeing now is a short-term measure, a one-off change. At best, food prices will fall by six percent, but in the longer run, prices are not determined by VAT levels. They are determined by other economic factors.”
Long-term effects require political decisions
Jonung believes the VAT reduction will quickly lower food prices, but maintaining this effect will require political decisions. His forecast? That politicians will not risk raising the rate again once the temporary cut expires on December 31, 2027.
“The most important factor is competition in the grocery market. Here we face a problem: many municipalities in Sweden hold a monopoly on the establishment of grocery stores, and they have used this monopoly to block discount competitors from entering the market.”
He argues that the government should plan to abolish municipal planning monopolies for housing and grocery stores, thereby paving the way for lasting reductions in food prices. It is competition at the local level, he stresses, that will determine what happens.
“That is what could open the door to a truly lasting reduction in food prices. Strong competition in the grocery sector can, in the long run, push prices down.”
Challengers
When asked whether Sweden needs more challengers in the grocery market, Jonung is clear: yes, it does. But how can such challengers be supported?
“The only way is to give them free access to the market. We should not have the planning monopoly we have today, which prevents low-price competition. We see municipalities effectively shutting out discount stores such as Lidl. This stops competition and keeps grocery prices at levels where they do not need to be.”
A positive outlook for discount retailers
We followed up with a couple of additional questions about consumers and discount retailers.
What can consumers themselves do to put pressure on prices?
“They can choose the stores with the lowest prices. That is the most effective thing consumers can do to bring prices down.”
How do you view the future for discount retailers in Sweden?
“I am optimistic about the future for discount retailers – provided they are allowed to establish themselves in the Swedish grocery market.”