food prices and the poor
07 May 2008

Fresh fruit and vegetables have long been zero rated for value added tax (VAT) purposes; so are staples such as milk, maize meal, brown bread and rice. Even canned pilchards are on the zero ratings list. But from time to time there have been calls for the list to be extended. And with food prices soaring, it’s at least worth considering whether the plight of poor households might be eased a bit by zero rating more foodstuffs.

That the government is doing, though it’s not entirely clear why the cabinet has chosen baby food, sorghum and chicken as the three items to target. The administrative systems are there so it’s easy enough to grant further exemptions from VAT. But that always means some loss of revenue to the fiscus. And the crucial issue is whether the poor would indeed derive the bulk of the benefit. Often when there are calls to exempt extra items from VAT, it turns out that these are consumed in larger proportions by the rich, so more of the benefit goes to them than to the poor. There would appear to be a good case for zero rating a widely consumed protein such as chicken, in particular, but only if the arithmetic of costs and benefits stacks up to ensure any such move would be pro-poor. Zero rating would in any event provide only a small discount on the price of basic foods.

Far more promising are the more targeted initiatives the government is looking at to help poor households survive high food prices. There is scope to extend existing initiatives: boosting school feeding schemes is one option; another is to make more use of the social relief of distress grant that is designed to provide short-term aid to poor people who don’t have access to other social grants. The government is also considering new initiatives such as food stamps that would target the poor. This approach is far more likely to reach those who need it than elaborate price controls or subsidies that could distort markets and ultimately do the poor more harm than good. Whatever the health minister might believe, markets need to be allowed to work.

www.businessday.co.za