Chief Economist’s Corner: Sure don’t look none too prosperous

As a child I watched John Steinbeck’s social realist masterpiece “The Grapes of Wrath” on TV. In this film Henry Fonda stars as Tom Joad, a farm worker who because of the severe drought in the US during the Great Depression of the 1930s is forced to uproot his family and move from the Midwest to seek fortune in California.

It is a very disturbing film and at the time it made a huge impression on me. Maybe this is why images of a desperate Henry Fonda flash before my inner eye when I think about the severe drought that has hit the US and is sending prices of corn and other crops skyhigh.

Fortunately, the social consequences are not quite as serious today as back then as the US Administration has already stepped in, offering massive financial support to the drought-affected farmers. Nevertheless, it is worth keeping an eye on developments. The rising food prices will erode households’ purchasing power around the world at a time when the global economy is in crisis and it is difficult to foster renewed growth. Consequently, the drought in the US may contribute to delaying the global economic upswing. Especially in poor countries there is a risk that the rising food commodity prices could cause huge problems. In these countries food still takes up a large proportion of household spending – as was the case in the US and Denmark in the 1930s. 

Taxes hit as hard as the drought

Food prices in Denmark have also tended to rise – again.  The reason is twofold: the US drought and rising indirect taxes. In July consumer prices rose by a hefty 2.3% y/y, but adjusted for all tax changes over the past year, the increase was actually only 1.6%. This is quite a difference, and for some wage earners the higher taxes are the main reason why their real wages and purchasing power are currently shrinking. Moreover, the indirect taxes hamper Danish competitiveness, limiting the effect of the government’s kickstart of the domestic economy. 

Hot potato and the Tom Joads of today

Not surprisingly, against this backdrop the (quite extensive) indirect tax system in Denmark now and then becomes a political hot potato  – also because some taxes do not have the desired effect. One example is the surcharge on foods that are high in saturated fat. This fat tax took effect on 1 October last year and was introduced to make us all eat more healthy food – and boost the government’s coffers. However, surveys show that we eat just as much saturated fat as before. But after the introduction of the fat tax we buy food products of a poorer quality or – just as a Tom Joad of today – we rush to the land of plenty south of the border (Germany) to fill our trailers with beer and soft drinks and other taxed goods at the flourishing border shops. 

Consequently, the effect of the fat tax is limited – both in terms of reducing waist sizes and boosting the government’s coffers. This is something that the MPs should keep in mind during the upcoming budget talks where new indirect taxes no doubt will pop up on the agenda.

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