Why do experts hate Labour’s potential GST exemption? - Thomas Coughlan

The National Party claims Labour will remove GST from fresh fruit and vegetables as part of its tax policy. Illustration / Guy Body

OPINION

When parties as ideologically opposed as the Greens and Act agree on something, you know it must have some merit.

One such policy, was New Zealand’s elimination Covid-19 strategy, which both parties backed in 2020.

Another such policy is not taking GST off things like fresh fruit and vegetables, which both parties spoke against last week when National’s Nicola Willis claimed it would form the backbone of Labour’s 2023 tax policy. The Herald has confirmed Labour has at least considered the idea.

The idea is dreadfully unpopular with tax experts and economists. Ironically, it is dreadfully popular with the public who perceive it as one way to make their groceries cheaper.

Defenders will say that many countries overseas have different rates of sales tax (GST by another name) depending on whether the product is fresh, or deemed essential or a luxury.

But they will neglect to say that in most cases tax experts overseas will often wish they had our system.

So unanimous is the hatred of this policy that the real intrigue isn’t over who likes it and who doesn’t, but over the reason people give for detesting it.

Speaking broadly, taking GST off anything is loathed because it is expensive, adds cost to businesses (which get passed on to consumers), undermines the government’s revenue base, and ultimately does not reduce costs to consumers.

Ultimately, in return for a minor compliance headache, the tax cut tweak delivers a tax cut worth hundreds of millions of dollars a year to supermarkets - the same entities the Government less than a year ago accused of pocketing excess profits of more than $1 million a day.

Expensive

Willis has claimed the policy costs about $500m - a staggering sum. Labour’s decision to bring back the 39 per cent tax rate was originally slated to raise about $500m in revenue (opening the Government up to the charge that it has implemented a high tax rate on people who work for their money that pays for a tax cut for people who own supermarkets).

In 2018, the Tax Working Group reckoned taking GST off all food would cost an astonishing $2.6 billion. It reckoned that would be enough to fund a direct cash transfer of $28.85 a week to each household.

Because wealthy households spend more, a direct cash payment would have left 60 per cent of households better off. The bottom two income deciles would only save about $14.50 a week from the plan - an astonishingly low amount given the policy’s enormous cost.

It doesn’t work

Also, those savings only transpire if firms pass on the cut. Companies will, on the day the tax cuts come in, make a big deal of cutting their prices to get customers through the door.

However, prices will very soon rise back to their original levels. Companies know that consumers are willing to pay the current price plus GST. There is nothing to stop our notoriously uncompetitive groceries sector slowly hiking prices back to that level.

Suppliers, too, will hike prices. Both suppliers and retailers will argue that in a time of high inflation both have been absorbing cost increases and the price rises are only to take that into account. Retailers will also pass on the increased compliance cost of having multiple different rates.

Unlike fuel, the Government will struggle to regulate in a way that forces firms to pass the cut on. Fuel is imported into New Zealand by a handful of companies from a tiny number of terminals, making it easy to regulate. Fresh produce comes from hundreds of different suppliers, both from New Zealand and abroad, making regulation very difficult.

Tax experts are not fans of a potential policy to drop GST from fruit and vegetables. Illustration / Rod Emmerson

Even if it did work it helps wealthy people more

Analysis of taking GST off all or some food paints it as an Ottolenghi kind of tax cut; people who have Plenty get Plenty More.

It benefits people who can afford fresh foods over people who can only afford canned or frozen.

The Tax Working Group reckoned the poorest households would save $14.58 a week if GST were taken off all food, compared to a $53.03 saving enjoyed by high-income households.

Analysis by the Herald’s data team found the poorest 20 per cent of households would save just $3.31 a week if GST were taken off fresh fruit and veges, compared with $13.73 saved by the highest 20 per cent.

The average saving would be just $6.82.

You permanently mess up the tax system

The biggest danger to any GST change is that you permanently damage the tax system. It accounts for a quarter of all tax revenue - equivalent to roughly the entire health budget. Exempting one thing means there will be calls to exempt other, equally worthy, consumables.

Spending is incredibly tight at the moment. Treasury’s current forecasts estimate more than a decade of budgets smaller than the one this year are in order, as we try to hit surplus and pay down debt.

The mantra of the tax system is ‘broad base, low rate’ - we tax everyone a small amount. The risk with GST is that we follow other countries in charging a low rate on some things, but a very high rate on others. The UK exempts most food and some essentials, but charges a 20 per cent rate on everything else.

The reason GST cuts unite so many disparate groups against them is they have immense downsides for almost no upside.

The upside is a paltry tax cuts of about $6 a week to the average household, the downside - which is more likely - is permanently undermining the government’s revenue base in order to fund tax cuts for supermarket owners.

Thomas Coughlan is deputy political editor of the New Zealand Herald, which he joined in 2021. He previously worked for Stuff and Newsroom in their Press Gallery offices in Wellington. He started in the Press Gallery in 2018.