The price of food

Will the price of food go up or down if we join the EU?

The price of food should go down, not up, if we join the EU. This can now safely be stated in view of the outcome of negotiations.

The reduction in prices will come about as a direct result of the removal of levies - or taxes - on imported food. But it should also come about as a result of increased competition.

EU membership could directly affect the price of food in three main ways - in one case positively, in two cases negatively. Let us look closer at how each of them was handled during negotiations and why the overall balance favours a reduction in prices.

In the first place, we still impose levies on food that we import and that in some way compete with local food products and local agricultural produce. Levies have made these food items generally more expensive than comparable items in the EU. On some food items, levies are so high and prohibitive that no importation takes place at all - meaning that our choice is limited to the Maltese product. So it's not just a question of price, it's also a question of consumer choice.

But upon membership levies will have to go - meaning that these items can land in our market at much cheaper prices. Moreover, the impact on the price will be clearly visible for consumers because the bulk of levies will be removed at one swoop upon membership and not in fits and starts leaving consumers staggering to see the difference.

Affected food products where prices will come down include processed beef, pig meat, poultry and eggs, fruit and vegetables and a range of food items, including tinned food, biscuits and ice-cream, drinks and wine. Many of them are regulars in our daily shopping list.

Consumers will save some 50 cents on every kilogramme of peaches, 45 cents on every kilo of pasta (e.g. spaghetti), 70 cents on every kilogramme of ice-cream and Lm1.50 on every litre of wine (see table). In many cases, prices will not just go down by a cent or two - but by much more. For instance, the price of a 500g packet of spaghetti can be cut by almost one half.

Although levies will be removed on imported products, this does not mean that the price of local products will remain high. They too should go down - for two reasons. First, because simple competition means that for Maltese products to be sold they must also compete on price if they are to remain in business.

But more importantly because - and this applies in particular to the agricultural sector - the farming community will be subsidised in a way that will cover the price difference between the Maltese product and the imported product. As a result, local farmers can remain in business and compete with imported products. Subsidies are part of an agricultural package that will support the sector over a ten year period. During the first three years of membership, the EU will fork out up to e11 million to contribute to these subsidies, apart from another e18 million to help revitalise the sector.

The second factor that could directly affect the price of food relates to a number of staple food items and raw food material where our prices are generally much lower than EU prices. Malta buys a number of staple items at world market prices, which are cheaper than EU prices. But upon membership Malta will have to adjust to higher EU prices. The difference between these two prices normally consists of EU agricultural levies in the case of products imported from outside the EU or the loss of the EU export-refunds (subsidies) in the case of products imported from the EU.

Although the EU is working towards a gradual alignment of EU prices with world market prices, at times, price differentials are still substantial. Increased prices would have negatively affected the agricultural community but also industry and of course, consumers.

Affected items are sugar, cereals, rice, semi-processed tomato products and some beef and dairy products.

In order to avoid this negative impact on the price of these items, during negotiations it was agreed that Malta could provide compensation so that consumer prices are not affected. The compensation will be paid through a state aid mechanism, partly funded by the EU itself, to compensate local industry and recognised retailers for the price difference between the world market prices and EU prices.

The mechanism would start at a level of full compensation and be gradually phased out by 2010, by which time, EU prices are expected to converge with world market prices. The impact of membership on the price of these products will therefore be negligible.

The third factor that could directly affect the price of food relates to VAT on food. Under EU law, food items should be charged VAT at least at a reduced rate of five per cent. Now it must be remembered, that even if VAT had to be introduced, the reduction in prices of items affected by levies would still be much greater than five per cent. But of course, VAT would have been introduced on the whole spectrum of food and not just on those products where levies apply.

Nevertheless, in order to avoid the adverse impact of VAT on food, during negotiations, Malta requested that food (and pharmaceuticals) should remain exempt from VAT for as long as they remain exempt in the UK and Ireland.

The EU's response remained firmly negative on the basis that the EU did not want to add a third exception over these two countries. But after long negotiations on this point, an agreement was finally reached during the Copenhagen Summit that Malta should continue to apply a zero-rate on food and medicines for a seven-year transitional period until January, 1, 2010.

In addition, however, it was also agreed that a declaration will be attached to the Accession Treaty stating that Malta only agrees to this arrangement on the premise that by the end of the transitional period no other country would still apply an exemption on these two items. In other words, if by 2010, the UK and Ireland would still exempt VAT on food and pharmaceuticals, Malta may consider the basis for the agreement to have changed and request an extension to its transitional period beyond 2010. On its part, the Maltese Government also declared that should VAT at a reduced rate of five per cent be introduced in 2010 on food and medicines, it would be prepared to provide a cost of living compensation.

The final point that must be made is that Malta looked very carefully at which prices could go up and which prices could go down as a result of membership. And during negotiations, it simply focused on cushioning or eliminating the impact where prices could go up.

The lesson: negotiations were quite instrumental on this particular issue. Without them, things could have looked much different.

Malta-EU Information Centre: Tel: 25909192; Fax: 21227580; E-mail address: euinfo.mic@magnet.mt; Website: www.mic.org.mt

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