Roger Partridge: GST policy breathtakingly cynical

A re-elected Labour government has pledged to remove the GST from fresh and frozen fruit and vegetables.

OPINION

Election years rarely see the best economic policy ideas. It is easy enough to understand why. Principles can go out the window when the stakes are either gaining power or losing it.

No political party is immune from engaging in a bit of economic vandalism. In 2017, the National Party couldn’t really have thought increasing Home Start subsidies was a principled way of addressing the housing affordability crisis. The policy was simply an answer to Labour’s equally unprincipled play for the middle-class voter with its first-year tertiary fees-free electoral bribe.

But this year’s assault on the tax system from the Labour Party is worse than usual.

Prime Minister Chris Hipkins’ announcement on Sunday that a re-elected Labour government would remove GST on fresh and frozen fruit and vegetables is not just bad policy. It is policy the prime minister knows is bad.

And he knows that we know it.

We know this because Finance Minister Grant Robertson publicly derided the idea in March last year. “GST is a comprehensive tax which makes it very easy to administer, and people in the room who’ve been in other countries with more exemptions will know it becomes an absolute boondoggle to get through,” he said.

“Boondoggle” was a good word choice. It means an unnecessary, wasteful or fraudulent project.

That is an apt description for a policy Labour’s Tax Working Group dismissed as “complex, poorly targeted for achieving distributional goals and generat[ing] significant compliance costs”. For good measure, the working group added that “it is not clear whether the benefit of specific GST exceptions are passed on to consumers”. Boondoggle indeed.

In making the announcement, Hipkins tried to bat away the criticisms by saying other countries, including Australia, take GST off fruit and vegetables. Indeed, he said, if anything, not having carve-outs for certain items meant New Zealand was an “outlier”.

But describing our GST system as an outlier was sophistry. A better descriptor would be enviable. That is because overseas studies have repeatedly singled out New Zealand’s GST system as the best in the world. Because successive governments have resisted the slippery slope of carve-outs, GST in New Zealand is more broad-based and efficient at raising revenue than anywhere else.

The reasons why the GST-free fruit and vegetables policy suffers from so many shortcomings are easy to understand.

Let’s start with cost and complexity. GST exemptions bring grey areas. Infamously, the UK tax authorities endured 13 years of litigation with Marks & Spencer over whether a tea cake was a tax-exempt biscuit or a taxable cake. The Australian Tax Office faced a similar battle. It included flying in an Italian expert as part of litigation over whether a mini ciabatta is a taxable cracker or non-taxable bread.

Since Labour’s policy was first foreshadowed by National’s Nicola Willis last month, an endless stream of experts has explained that New Zealand will not be spared.

The boundaries between fresh and frozen fruit and vegetables and other processed food may seem clear-cut. But only a moment’s reflection reveals the problems. Is a pot of mixed cut melon fresh or processed? Does coating it in lemon juice to preserve it make a difference? Likewise, is a bag of bite-sized celery sticks fresh vegetables or a processed snack? Is peeled garlic processed?

And what about minted frozen peas? Does coating them in mint mean they are processed or simply frozen? You can almost see the tax lawyers rubbing their hands together in glee.

Prime Minister Chris Hipkins knows that removing GST from fruit and veges is poor policy, says Roger Patridge. Photo / Mark Mitchell

But if complexity impairs the policy, its poor targeting should be its downfall. In making the announcement, Hipkins claimed that all the savings from removing GST from fresh and frozen vegetables would be passed on to consumers. Based on an average spend of $32.50, that would see a consumer save nearly $4.25 a week.

But, as the prime minister knows, the evidence contradicts his claim. Labour’s Tax Working Group reported that the most comprehensive research estimated that changes in value-added tax rates for specific goods and services have an estimated average pass-through rate of only about 30 per cent.

There are many reasons for this low pass-through rate. But imagine a simple example. If supplies are short because of a cyclone, removing GST at the till just means grocery retailers will be bidding against each other for what supplies are left if demand goes up. The benefit passes through to suppliers who have stock left.

It is difficult to predict what pass-through might be for a whole category like fruit and vegetables. But at a 30 per cent pass-through rate, over four years, the policy will cost the Government $2.2 billion in lost GST revenue and benefit consumers by only $660 million. A cool $1.54b would be dissipated along the way.

Hipkins claimed that the newly established grocery commissioner would ensure savings get passed on to consumers. But the problem will not be with the supermarkets but with their suppliers. In any case, if ensuring full pass-through was as easy as the prime minister claims, governments overseas would surely have ensured better outcomes in their own countries.

The policy is also a scattergun approach to helping families squeezed by the cost-of-living crisis. The benefits of any savings passed through to consumers will benefit the rich and poor alike. Indeed, as high-income households spend more on fresh fruit and vegetables than low-income households, they will gain more from the policy than the households the policy aims to help.

The $2.2b-and-rising hole the policy creates in the Government’s finances is a further problem. The prime minister has ruled out wealth or capital gains taxes. But the lost revenue will have to be made up somewhere.

In speaking to the policy, Robertson made clear that part of the burden would fall on landlords, with Labour planning to help pay for the policy by reintroducing a ban on the deduction of depreciation on commercial buildings as a tax expense. Yet some of the resulting increase in commercial landlords’ tax costs will ultimately flow through to commercial rents and from there to the prices paid by consumers. This is yet one more messy consequence of the GST proposal.

All this makes the proposal an incredibly bad way of helping low-income families. And all this is well known to the prime minister.

Labour’s focus groups may like the policy idea. If presented with something for nothing, who wouldn’t? But there are few free lunches with policy reform. And this reform brings overwhelming problems.

In proposing the policy, Labour is simply exploiting ignorance. Breathtakingly cynical may be too mild a description.

- Roger Patridge is chairman of the NZ Initiative.