Government should cut GST on food if it’s worried about butter price – Fran O’Sullivan

Finance Minister Nicola Willis met with Fonterra's chief executive to discuss the cost of butter. Photo / Mark Mitchell

KEY FACTS

• Nicola Willis met with Fonterra CEO Miles Hurrell to discuss rising butter prices and global dairy trends.
• Butter was $8.60 per 500g, up 46.5% in the year to June, according to Stats NZ.
• A large proportion of the price of butter is dictated by global demand for the dairy product.

Nicola Willis has been around long enough to know you don’t summon the head of New Zealand’s largest company into the Beehive for a spanking over skyrocketing butter prices unless you intend to emerge with a solution.

The unedifying spectre of Miles Hurrell, CEO of dairy co-operative Fonterra, being chased by TVNZ’s political editor outside the Beehive even before the Willis meeting raised eyebrows.

But as a former Fonterra senior executive herself, Willis was already fully aware of where the co-operative stands.

The Finance Minister did not need to call Hurrell in to reaffirm that global dairy prices are at a high and that this would inevitably spill over to higher farmer returns and, in turn, boost regional and finally national economies. (That’s the plus side you didn’t hear about before the meeting).

Or that any notion of Fonterra slashing its own margins was not going to happen. They are thin when compared with the margins applied by supermarkets to dairy products, and she knows it.

The upshot is that Willis did seek explanations from Hurrell over the co-operative’s pricing, which she of course accepted. Within days, she was talking up Fonterra and the surging global prices on the Mike Hosking show as a plus – as indeed they are when it comes to the impact on the New Zealand economy.

Hurrell subsequently made it clear his company is not moving to a two-tiered pricing system: an export price geared to global prices and a subsidised price for domestic consumers. There was more besides.

It was sensible for Fonterra to shut the issue down quickly. It currently has its consumer brands business on the market. Any suggestion of a move to a two-tiered system would be a complication to that sales process or indeed an IPO of that business if that ultimately turns out to be the Fonterra board’s preferred option.

But while there was an element of the performative to the Beehive shenanigans, it does underline how much “cost of living” issues are a lightning rod when it comes to sparking domestic dissatisfaction with the Government.

Willis later described her meeting with Hurrell as “constructive and engaging”, underlining the fact that Fonterra does not control retail prices and that the final price is set by supermarkets, whose contracts and pricing strategies vary.

This was more grist to Willis’ campaign against what she claims are supermarkets profiteering at the expense of consumers. Already, she has been working to reduce the barriers to entry for other competitors.

Willis has been encouraged that the Commerce Commission has taken a case against grocery giant Foodstuffs North Island and Gilmours Wholesale to court over what it believes is cartel conduct.

The regulator said civil proceedings would be filed against the big grocery suppliers under the Commerce Act and Grocery Industry Competition Act (GICA). Foodstuffs “strongly denies” any unlawful conduct.

The Commerce Commission has also levelled criminal charges against retailer Noel Leeming over what it claims is a misleading price-matching promotion.

The company “firmly” maintains it had not committed an offence and would vigorously defend itself against multiple charges of misleading customers under the Fair Trading Act.

Put that to one side.

Prices have escalated on multiple fronts: dairy products, meat and some fruits; electricity and gas, rates, insurances. But they have decreased on others: mortgage and loan interest rates, and some fuels.

There is little point in trying to jawbone prices down.

In many respects, the answer lies with Willis.

If she is overly concerned, she could wipe the 15% GST from particular food items. This is the case in Australia, where its 10% GST does not apply to meat, fish, produce, cheese and eggs, plain milk and cream, bread, butter and other spreads, bottled water, tea and coffee, cooking ingredients and oils, or infant formula.

In Britain, most foods are zero-rated. Many European countries have reduced value-added tax rates for food, typically running at 5%-7%. Basic foods are exempted in Singapore, there is an 8% rate in Japan, and in the United States some states exempt various food items from sales tax.

The upshot is that New Zealand verges on being an outlier in this area.

Any changes to the GST regime would, however, have an impact on how New Zealand’s tax regime is perceived as being neutral.

Farmers are not the enemy.

There is much to celebrate from our rural sector, which will deliver nearly $60 billion in export earnings this year.

The fixation on rising prices has also overly consumed the Prime Minister, who frequently talks about “cost of living issues”.

But this is not going to be solved in the medium term.

The upshot is that, short of any intervention by the Government, consumers will just have to suck it up.