KEY POINTS:
Why not remove GST from food? It seems a simple response to the worldwide price surge until something as apparently simple as food has to be defined. Should the tax be removed from all food or just the items that have risen significantly? Of those, dairy products, chicken
and bread, should it be removed from the entire category - chocolates, say, as well as fresh milk - or just the "basics"?
How would the boundaries be drawn? And since GST is charged at each point in the production chain, at what point would untaxed milk become taxable camembert?
When any country attempts to broaden its tax base with a levy on consumption it faces myriad demands for exemptions. New Zealand faced them when GST was under debate in 1986. Food was not the only necessity said to be worthy of exemption, and it would not be alone now. The global price crisis might be limited to food but were tax to be lifted from one staple, renewed calls would soon be heard for exemptions for everything from medicines to local body rates. That is how a tax unravels.
Unfortunately, public spending would not be wound back with it. Sooner or later the loss of GST revenue would be recovered in higher income tax, which would suit the political leanings of the group that has launched a petition to remove GST from food in the current crisis. Flat-rate GST can take no account of consumers' personal wealth.
But, as the Prime Minister said yesterday, it is better to use the welfare system to help lower income earners cope with the shock in their food bills. It would seem unwise to undermine a clean, simple, familiar and well-functioning consumption tax for the sake of relief from a passing storm.
The global food crisis has several causes, some of them permanent trends, others temporary policy errors. Among the latter is the diversion of grain for biofuels, particularly in the United States where the Bush Administration has subsidised biofuel less for its dubious environmental benefits than to reduce the country's dependence on imported oil. That nonsense might end with the Bush presidency.
So indeed might the rise in world oil prices, which has also contributed to high food prices through fertiliser and transport costs. No shortage of oil is driving its price but rather a reluctance to invest in fossil fuel supplies which may face charges for carbon emissions in response to global warming.
Climate change is one lasting trend upsetting fuel and food markets, rising demand is another. The rapid spread of wealth in China, India and other emerging markets has vastly increased demand for grains, meat and dairy products. This is good news for exporters of food, and it will be no less good for the hungry importers if markets are allowed to match supply to demand.
High world prices carry the seeds of the solution, if they are allowed to function. Farmers everywhere will increase production if they can reap the rewards the prices offer. Countries such as those in South America that have responded with food export bans deprive their farmers of those prices and delay the increased production the world urgently needs.
Removing taxes on food would not do the same harm but nor would it do the country much good. Every dollar no longer paid in GST would be extracted in some other form, probably from wages. Once food supplies had caught up with demand and prices had relented we would find ourselves with higher income taxes and a consumption tax riddled with anomalies. Only then will we remember that GST used to be so consistent we hardly noticed it.
