Is the cure for rising prices as simple as g s t?
by Hank Schouten
from Dominion Post
27 September 2008
THE PAIN inflicted on households by a steep rise in food costs has prompted a call for GST to be taken off food.
During the past year, prices have shot up 13 per cent and some staples have soared. Butter is up 87 per cent, cheese climbed 44 per cent and bread now costs 17 per cent more than it did 12 months ago.
Households are also burdened by high petrol and power prices. The newly formed broad-left Residents Action Movement (RAM) is now calling for the goods and services tax (GST) to be lifted on food.
Opinion polls indicate widespread support for the idea. The Fairfax Media-Nielsen poll in May reported 73 per cent of people want GST taken off food.
RAM has organised a petition and claims to have gathered more than 20,000 signatures on its People's Procession to Parliament, which began in Kaitaia in the Far North last weekend.
The procession passed through Aotea Square in Auckland yesterday and the campaign will roll through Porirua on Tuesday and Upper Hutt, Lower Hutt and Wellington from Wednesday before the petition is presented to the Maori Party at Parliament on Friday.
Most countries with similar sales taxes exempt food, but the idea has been dismissed by the two main political parties. Maori Party support could be crucial, however, given that its MPs could hold the balance or power in the next parliament.
Why should GST be removed from food?
Advocates say it is a social justice issue. GST is a flat 12.5 per cent sales tax on virtually all goods and services and that is unfair to those on low or modest incomes.
Removing it would improve the lives of low-income families who are now unable to afford good food, no matter how well they budget.
RAM co-leader Grant Brookes says: "It's a tax that is carried disproportionately by people who live week to week.
"GST on food is the most unfair of all as we have to eat; we have no choice."
RAM chairman Grant Morgan says: "It is inequitable that low-income people, who spend virtually all their income just to maintain themselves each week, have to pay GST on all their transactions when all the speculators escape paying GST on all their financial transactions."
He says that, assuming the average family spends $250 a week ($13,000 a year) on food, removing GST would save it $1444.
The Statistics Department says food accounts for about $150 of the $1000 weekly household spend and GST on that would come to $16 a week, or $832 a year.
But savings might not even be as high as that, because they would depend on whether all food was exempted from tax.
What are the arguments for retaining GST on food?
Geof Nightingale, a tax consultant with PricewaterhouseCoopers, says that, in theory, low-income households would benefit the most because they spend a higher proportion of their income on food. Then again, people who earn more tend to spend more on food and they might benefit more.
He is sympathetic with what RAM is trying to achieve, but "removing GST is not the way to fIx it".
"The reason for that is that, once you start introducing exemptions, you introduce complexity into the system and compliance costs rise quite quickly.
"In jurisdictions with different tax rates on healthy foods versus nonhealthy foods, you get into arguments about potatoes not having GST but chips do ... it can all get a bit silly. New Zealand is better served, public policy-wise, having an efficient low-cost GST system.
"Secondly, there is no guarantee that removing gst will flow through to consumers."
Prime Minister Helen Clark says: "We have an across-the-board system which is generally regarded as being simple to administer. That means it is very low in complexity, which means it is low on compliance costs, so therefore there would be considerable reservations about changing it."
National leader John Key says: "One of the big issues with GST on food, for example, is while it's conceptually a nice idea it is difficult to implement.
"It opens up the door to substantial deterioration in the integrity of the GST system and I am not convinced if we cut GST on food that it would necessarily be passed through to consumers."
United Future and the Greens are also against the idea. Green MP Sue Bradford said poor people needed income increases rather than simplistic solutions.
What are the counter-arguments?
Mr Morgan says claims that it will be too complex and costly are all red herrings.
"It is very simple. There are already exemptions where shops sell second-hand goods, that don't attract GST, alongside new goods. You just key it into the computer once."
As for suggestions that prices might not come down, he says strong price competition between the major supermarket chains will ensure savings will be passed on.
Maori Party co-leader Tariana Turia also says administrative complexity is no excuse. "National and Labour need to stop thinking up reasons why not... If we are serious about eliminating poverty, and caring for the wellbeing of our children, we must listen to the good ideas of the people and be prepared to do something about it."
What do other countries do?
New Zealand is one of only three countries in the 30-nation Organisation for Economic Cooperation and Development that has a sales tax on all food. Some countries have lower taxes or exemptions for food.
But it can get complicated and confusing. In Australia, bread, fruit, vegetables, meat and bottled water are GST-free but a lot of other items that go into the shopping trolley are taxable – cakes, biscuits, icecream, snacks, sausage rolls, flavoured drinks and prepared meals. While a hot cooked chicken and cheesecake are taxable, a cold cooked chicken and a dairy dessert are GST-free.
Mr Morgan skirts the issue, saying that, though the petition calls for GST to come off all foods, "most people would say that, if we could get it off the essentials, that would be a big advance".
"Most people understand what we are doing, which is to build such a consensus around removing GST on food that Labour and National and their allies, the Greens and ACT, will seriously consider it. Then we can talk about the detail."
What would it cost the Government?
Removing GST on food would cost $2.1 billion. But Finance Minister Michael Cullen says it could be more than that, depending on where exemptions kicked in.
Assuming that the lost revenue would have to be made up by increasing GST on all other goods and services, the Government would have to lift the rate to 15 per cent.
He is also worried it would open up arguments on whether GST should be paid on all sorts of other goods and services, such as medical bills, health services, education, childcare, clothing and local body rates.
WHO IS BEHIND THE CAMPAIGN?
The Residents Action Movement was formed in Auckland 2003 to campaign against council rates rises. Since then it has campaigned for free public transport and lobbied for low-paid workers. Its candidates won about 100,000 votes in Greater Auckland's 2007 council elections. It went nationwide in March, claims 3000 members and this month named 26 candidates it would be standing in the general election.
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