Everywhere else, countries recognise the need to exempt food from GST
by Gordon Campbell
Dead certainties are a rarity in politics, but it’s a safe bet that GST will be raised to 15% in the May Budget, to help fund the income tax cuts the government has in mind. Rather than tax what people earn, more weight will be given to taxing what they spend – a shift that will leave more money in the pockets of the relatively well off, and place a heavier burden on workers on low incomes, and on beneficiaries. That’s because those on benefits and the working poor have less discretionary income, and spend a higher proportion of their income on basics, such as food.
For that reason, other developed countries exempt food from GST, VAT, or whatever name they give to their consumption tax. Australia, for instance, has operated a food exemption for GST for nearly ten years. Other countries though, have not adopted the NZ model – despite the esteem in which it is allegedly held. Like our enthusiastic embrace of free trade and asset sales, the ‘simplicity’ of our GST system has many admirers but few, if any, imitators.
New Zealand does pride itself – correction, the bean counters at IRD and within corporate boardrooms pride themselves – on our refusal to exempt food, given the dreadful ‘anomalies” this would entail. It should be pointed out that we also lack the sort of capital gains tax that other countries feel is essential, and our economy has suffered as a result. When it comes to New Zealand not having a GST food exemption though, most of the people who suffer from the lack are tidily tucked away, in places like south Auckland.
A food exemption for GST has been mooted before. Currently, Maori Party MP Rahui Katene has drafted a private member’s bill to exempt “healthy” food from GST. In February, this media report from Whangarei suggested that a wide level of public support exists for the proposal. Revenue Minister Peter Dunne though, has said there will be no GST exceptions for special items in this year’s Budget.
Why raise the issue again now? There are four good reasons for doing so. One, because the GST hike is imminent. Two, because there is a lot of talk about the desirability of pursuing a single Australasian market, and Australia operates their allegedly complex food exemption so smoothly and cost effectively that compliance is no longer a contentious issue over there. Three, because in December, the Australian Tax Office unveiled a computerized model that makes GST food and beverage compliance extremely easy to manage, and four, because a major New Zealand research study released in March has proven that if supermarket customers were given a 12.5 % price discount, an almost dollar for dollar higher investment in healthy food will result, and will be still observable six months later. Cutting GST on food in other words, would will result in lasting health benefits.
The question then is not why do it – but why not do something so easy, so readily manageable by business, so justifiable on grounds of social justice, and so likely to deliver practical health benefits to the community?
1. The political fallout from a food exemption are trifling, and transient. In Australia, GST is levied at 10%. This means that if GST is raised to 15% here in May, our GST rate will be 50 % higher than across the Tasman. Keep that in mind when your hear politicians saying that we must, must, must lower our corporate tax rate to match the corporate tax rate that prevails in Australia.
Basic food for human consumption – as this Australian Tax Office table explains is adjudged in Australia to be GST free. This includes food and beverages such as fruit and vegetables, meat, eggs, bread, cheese, soup, milk, tea, coffee, fruit and vegetable juices (with 90% minimum by volume of juice) breakfast cereals, flour, infant formula, sugar- and some beverages and beverage ingredients, including the fats and oils marketed for culinary or for cooking purposes.
Conversely the food that is GST liable includes restaurant and takeaway food and the prepared foods that such outlets customarily offer: such as quiches, pizzas, sandwiches, food platters, hamburgers, hot dogs, confectionary, biscuits, popcorn, ice cream and luxury items such as caviar and fish roe.
The intent of the distinction, and its logic is clear : it aims to exempt the food and ingredients that people use to feed their families, and protect them what is essentially a socially regressive tax. At the same time, the aim is also to tax the kind of food available from restaurants and takeaway outlets, and luxury items. In Australia, the exemption enjoys consensus support, right across the political spectrum. It came about because at the 1998 election a political impasse existed between the John Howard government advocating GST and a Labour opposition hostile to it,- so, the Democrats stepped in and negotiated a raft of exemptions, including food. The fallout from doing this deal subsequently divided and destroyed the Democrats as a political third force in Australia.
The deal was done by then. During the 2001 election, the Labour Party vainly tried to revive public opposition to GST. During its election campaign that year, Labour tried to highlight the exemption given to uncooked chickens (bound for preparation at home ) in contrast to the GST being levied on the cooked chickens being sold in the same supermarkets. Big deal. The public were highly unimpressed. Labour lost the election, and this episode really marked the death knell in Australia of public opposition to GST
Today, the food exemption is not a factor on the political landscape across the Tasman at all. For this article, I contacted the leading Australian tax expert Professor Michael Walpole of the University of New South Wales, a long time opponent of the GST food exemption – and asked him whether the exemption is still a feature of the political debate about tax in Australia. Or are the equity arguments and compliance procedures now widely accepted?
“It does not seem to be a hot topic,” Walpole replied. ”I think there is resignation on this. Computers and systems are better – there is a simplified system [within the relevant division of the legislation] for really small businesses selling food, and non-food items…The equity argument has probably become accepted by the wider community – although it is probably flawed, as research suggests the rich eat more food and more raw food than the poor.”
Walpole’s colleague. Professor Cynthia Coleman at Sydney University concurs : We [Michael Walpole and I]both think that the food exemption is not really part of the political landscape any more.“ Professor John Quiggin (pictured left), a leading Australian economist and commentator based at the University of Queensland, told me that compliance problems with the GST exemption are now considered negligible. “It couldn’t be described as a major [cost] let alone a prohibitive burden. As you say, with the general shift to computerisation, the [compliance] costs now would be small, particularly on the assumption that all grocery foods were exempted. [Conversely] since they are mainly service items, restaurant meals and takeaway food should be included in the tax base.”
Quiggin continues: “There’s a bit of irony here – the advocates of a ‘broad-based’ GST were so keen to limit exemptions that they pushed the ‘fresh food’ compromise which produced substantially greater compliance costs than an across-the-board exemption. As an issue of political debate, the food exemption for GST is pretty well invisible. The GST is settled, and no-one really wants to touch it, except at the edges. It was excluded from the [upcoming] Henry Review of the tax system. Even among tax economists, there’s very little interest in re-opening this issue.”
2. Health benefits will follow, from a food exemption Using tax to manipulate the market for certain products is a widely accepted practice. The whole rationale for taxing tobacco at higher and higher levels is based on the premise that demand for socially harmful products can be managed by raising the price. A GST food exemption is based on the same principles of price elasticity – that demand for healthy products can be fostered by lowering the tax, and thereby reducing the price.
Is the reason for doing so however, based on fairness and social justice – or is the motive to promote health, by using a price signal to steer the public away from takeaways, and towards healthier, home-cooked food? In the political debate about GST there is often an overlap between justice and health issues – and this makes a recent shopping study carried out by the Wellington School of Medicine highly relevant to the debate. The research has been gaining international attention, but it has been little reported here, as yet.
The Medical School study of 1,100 shoppers split them into four groups for purposes of comparison: people who got a price discount of 12.5%, people who got the same price discount plus nutritional education, people who received just the educational information, and finally, those who got neither.
Their shopping habits were then compared, over an extended period of time : not from what they said they bought, but from their actual dockets at Foodstuffs and Pak’n’Save. The purchases that were studied were limited to the 3,000 top selling items on the industry’s Shop’n’Go computerized product catalogue, and these were matched, for nutritional evaluation, against 1,000 items from the Heart Foundation’s “Pick the Tick” roster of healthy foods, which are essentially defined by their tolerable levels of salt, sugar and fats. “Edam cheese gets in,” survey head Professor Tony Blakely of the Medical School explained, “but not mild or tasty, because of higher fat. We weren’t looking for total avoidance, but looking for the healthier options. Green milk got in, blue milk was out.”
The main findings from the survey? People, Blakely explained, kept on buying almost the same amount of saturated fats, regardless of the price and regardless of the educational material they were given. However, they used their 12.5% price discount to buy a significantly higher amount of healthier foods, and were still doing so at the end of the survey. Education alone made little or no impact. “We didn’t see an improvement for nutrition interventions. And they were highly targeted. We spent a huge amount of effort on them. People would get pamphlets in the mail [saying] ‘Look we notice you’re drinking blue milk, have you ever though of drinking green milk, and the cost is the same…It was very well done education, which had no effect. “
Did the survey offer any support for a food exemption for GST – given that it can’t be accidental that the researchers chose 12.5% as their level of price discount? Blakely laughed. “We deliberately picked GST as the amount to take off, to get peoples attention and to directly test it. We make no apologies about that…but we also felt it was what we thought would be the right amount, if we were looking at a price-driven change.”
Therefore, Blakely continued, one of the policy implications of the study certainly does concern the removal of GST from food items. “But that comes with distinct advantages and disadvantages. The advantages might include that heaps of other countries do it. Just about every European country takes GST or value added tax off food. Not – normally – healthy food, but food. Because its about an economic imperative in protecting families from the cost of their essentials being too high. “
The disadvantage, in his view, was that “every other bean counter in the world who is working with tax” held up New Zealand as the great example of simplicity in its GST system, and people “may not want to let go of that simplicity. But that’s a debate that should happen, and it should be based on the evidence.” With that in mind, what had his research found out about the health advantages of exempting food by an amount equivalent to GST ?
“That you will see some health gains from it,” Blakely replied. “Given that nutrition education didn’t work, and that it doesn’t seem as if [promoting] individual responsibility is a high-return avenue to take, either. It is the structure of how we provide the food – and in this case, price is an element of that structure – that is effective. So, as a society we just can’t keep on saying that its all about nutritional education, and all about personal responsibility. We live in a context, and one of them is price. And if we are going to take the obesity epidemic seriously, we are going to have to intervene in those areas.” His study suggests that price is one intervention that works.
In policy terms, Blakely added, the evidence is that education may not significantly change the behaviour of individuals in their actual purchasing decisions. Even so, he believes education can play a useful role within the wider public debate. “From the public health point of view [the study] shows that price matters, and changing the price contours will have a health gain. And far as exacting change among individuals, price is more important than education I agree…but if we are going to intervene where there is market failure (and this is one of them) and you are going to introduce regulation, you need a population that agrees with that, and are happy to support the politics of it. So you still need education. But health education of individuals to change their patterns of consumption doesn’t really go very far, if you do nothing else.
“It all came down, he agrees, to the price elasticity demonstrated by the study. Because the 12.5% price reduction produced an average gain of 11% in the purchase of healthy food ? “That’s right. So if you divide one by another, you’re getting towards a ,85 price elasticity. It was almost dollar for dollar.”
Computerisation makes compliance easy. Any introduction of a GST food exemption would create two potential sources of cost to business : namely, the one-off costs of the equipment to manage the exemption efficiently, and the ongoing costs of identifying and managing the distinctions between items that qualify, and those that don’t.
As Professor Michael Walpole noted above, the Australian tax legislation has been streamlined to assist compliance by small firms. In December, the Australian Taxation Office also released a computerised package called GS1-Net, that simplifies for business the process of managing the food exemption – essentially, by ensuring that the food and beverage items qualifying for the deduction have been correctly assessed, well before they reach the retail level. As the ATO website states : : “The Tax Office assures manufacturers and other suppliers who rely on GS1Net GST classifications for food and grocery products, that there will be no risk of penalties or of retrospective adjustments to their GST liability.” In the New Zealand environment, it would mean that the same onus of responsibility for clarity and certainty would rest with the IRD.
The GS1 Net package could be readily adapted for use here. The model belongs jointly to GS1 Australia and GS1 New Zealand, the non-profit trade organizations that administer the global GS1 system of numbering, bar coding and electronic messaging for supermarket products within Australasia. As Peter Stephens, CEO of GS1 New Zealand says, his organization actually owns a 15 % stake in the existing GS1Net package in use in Australia.
Already, there is considerable convergence between Australian and New Zealand supermarket operators in placing their product information on the GS1 system, for ready access in both markets. As Stephens stresses, the retail price is not part of the information disseminated by the GS1 system and accessed by scanning the barcode. The retail price, which is the last link in the chain, is added by the retailer or the supermarket head office – but crucially, the data stream routed to and from the Australian Taxation Office (or IRD here) can re-assure all concerned what the correct exemptions for particular items should be. In essence, it takes the initial decisions on exemptions upstream, lends them certainty, and makes them readily accessible. Depending on how complex the exemption system here might be, simple additional apps could spit out the correct final price at point of sale.
Point being, Australia has shown just how simple the process of managing the food exemption can be – and the computerized system that would deliver certainty to business on how to manage it is already in existence, and the IRD could readily be plugged into the GS1 system that already governs product information flows within the New Zealand food and beverage marketplace. (GS1 incidentally, may also contain the solution to New Zealand’s vexed issue of country-of-origin and ingredient labeling. Shortly, a simple phone app will enable consumers to use GS1 to scan – with their cellphones – the barcode, which will then be able to print out onto their screens far more product information about allergens and country-of-origin sources of mixed ingredients than could ever be fitted onto a label.)
Inevitably, some anomalies will arise however a food exemption is defined. As Professor John Quiggin has pointed out, an exemption could be defined as ‘grocery items’– or all food could be zero rated, and tax levied only on the service component at restaurants, bars and takeaways. The Australian experience however, demonstrates that an exemption (anomalies and all) can enjoy wide public support – and need not impose a prohibitive burden on business or the economy. Nor need it have lasting political consequences for any government enacting it.
Dunne and Finance Minister Bill English should, in other words, be willing to reconsider their current hostility to exemptions. There are pressing reasons for them to rethink the issue. Otherwise, people on middle incomes and the poor are facing a double whammy in the May Budget. GST is a socially regressive tax – as mentioned, it hits those on low incomes who have less discretionary income, far harder. Given that the income tax cuts planned for the May Budget are themselves also highly regressive – on the evidence, a very small number of high earners will get most of the money up fort grabs – the case for a food exemption is doubly compelling. As things stand, a few will win heavily – and with luck, some middle income New Zealanders may be only be no worse off, and others will be significantly worse off. Income inequality will increase.
While we await the final details about what Bill English has in mind, the outlook is not encouraging. A few weeks ago, the mainstream media published verbatim somer recent NZIER calculations about the combined impact of a GST hike to 15% and income tax cuts – most of us, the NZIER considred, would be slightly better off. However, even if fo the sake of argument one accepted their figures as gospel, the combined income tax changes / GST hike would leave those households with a median income of $65,000 a year only $10 ahead of where they were.
Those earning under $19,600 would see no gain at all. Every household earning up to the average wage would get $5 or less from the exercise – which, in other words, would be less than the famous block of cheese once derided by the National party. Those earning over $146,000 were estimated to be $90 a week better off. However, these NZIER research figures were highly suspect – in that they calculated the impact of the GST hike at a flat rate, by assuming it would affect 80% of income in each and every income band. In all likelihood, this would under-represent the impact of a GST on the poor, and would over-estimate its impact on the wealthy.
The politics of how all this wiol play out have yet to be seen. How can the Maori Party for instance, possibly rationalize the havoc that the regressive income tax cuts, and the regressive hike in GST will wreak on their constituents? The government to which they belong is ignoring one obvious safeguard, a food exemption on GST ? As a consequence, the effects of the GST hike and its willful lack of a food exemption safeguard will fall most heavily on the families of the poor – and will thus promote further hardship among Maori and Pacific Island families who are disproportionately on low incomes.
In the media coverage of the May Budget, the focus will inevitably be on the detail that it contains – but right now, perhaps we should be talking about the road that is not being taken.