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    How will the return of VAT on food affect inflation?

    In light of recent global events such as the pandemic and the conflict in Ukraine, Poland’s era of fiscal abundance is drawing to a close. The country’s financial situation has been precarious for some time, with a projected deficit of around 6% for 2023, and a modest improvement to 5-5.5% expected for 2024, according to European methodology.

    Impending Fiscal Measures

    Poland is poised to enter the Excessive Deficit Procedure (EDP) by 2024, necessitating plans to reduce debt as mandated by the EU. Consequently, the new government grapples with the unpopular but deemed effective measure of tax hikes to bolster budget revenues.

    Tax Policy Revisions

    Contrary to popular belief, the proposed tax adjustments aim to revert to pre-inflation levels rather than outright increases. For instance, the reduced VAT rate on food, implemented in 2022 amidst inflationary pressures, is set to be restored.

    Impact on Inflation Dynamics

    The reinstatement of a 5% VAT on food items raises questions about its inflationary implications. While some argue it may contribute up to 1.3% to consumer price index (CPI) readings, others contend that moderating inflation trends and market dynamics could mitigate significant price hikes.

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