Bryce Edwards: How Labour’s tax cut will do little but benefit the rich

Who would profit most from Labour’s GST-exemption policy?

It won’t be those struggling with the cost of living – the average shopper is unlikely to see any real change in supermarket prices if Chris Hipkins was to implement his tax-off fresh and frozen fruit and vegetables.

The real winner would be the supermarket company duopoly who will pocket most of the GST exemption, along with supermarket lobbyists, the lawyers, accountants and public servants who would be in demand to administer and fight over the tax rules. Even if there is a trickle-down in reduced fruit and vege prices, economists say most of this will be disproportionately enjoyed by wealthier shoppers.

What’s more, Hipkins has reiterated there would be no new capital gains or wealth taxes, and he’s announced that income tax rates also won’t be changed by Labour.

This all comes in the context of heightened concern and awareness about the massive inequalities and dysfunction in the tax system and economy. Hence although Labour thinks it has just announced a big and popular election policy that will help those struggling, for many it will serve to reinforce that Labour has spent six years in power doing little but helping the wealthy and Wellington professional managerial class look themselves.

Why GST off fresh food will help the rich more than the poor

Labour is budgeting $500m per year on this tax cut. But how much of that will end up in consumer pockets? And how much will end up with poorer citizens?

The consensus amongst economists seems to be that when such tax exemptions are introduced, companies avoid passing the bulk of the savings onto consumers. Labour’s own 2018 Tax Working Group concluded that only about 30 per cent of tax cut normally gets passed on. The rest goes into increased profits.

There are plenty of overseas examples of this. Today, economist Brad Olsen told Newshub: “We’ve seen when the UK, for example, removed their version of GST off eBooks, you go forward a few years, eBooks are more expensive than they were before, there was no actual reduction in that tax… We saw as well the likes of period products in the UK when they had their GST rating changed, again, only about 20 percent of the change was actually passed on to consumers.”

The Herald has calculated that the lowest-earning household could save just $2.21 a week, or $115 a year, from Labour’s tax cut.

Labour’s answer to this is the establishment of a “Grocery Commissioner” who can essentially patrol the aisles checking that the GST discount is really being passed on to consumers. But such a promise has done little to impress commentators who can’t see it being effective, but instead just more bureaucracy.

Economists also say that where GST savings are passed onto consumers, this benefits the rich, who spend more on fresh fruit and vegetables. Again, Olsen explained this today: “We know removing GST removes it for everyone, millionaires, people who obviously don’t need that support and because those households actually spend a lot more dollar for dollar on the likes of fruit and vegetables, those upper-income households actually get a lot more from this policy on a dollar basis”.

For this reason, Labour’s tax cut is being criticised by poverty and public health experts. Economist Susan St John of Child Poverty Action Group says the tax cut is “rather meaningless” because it gives the least benefit to those who need it the most. Likewise, Dr Sally Mackay, a food expert at Health Coalition Aotearoa is reported as believing “the policy was not evidence-based, gave a negligible level of saving and was unlikely to alter spending choices.”

Economists say if Labour really wanted to make a difference to those who are struggling, they could much more effectively and efficiently just give the $500m to the poor.

There’s nothing progressive about making the tax system more complex

Labour has promised to establish a working group which will adjudicate on what fruit and vegetable products should be exempt from tax. There will be plenty of debates, and possibly legal battles, over what should qualify under Labour’s rules.

And, of course, there will be greater debate about what the rules should be. At the moment, Labour has decided not to include other foods. Bread and butter, for example, are excluded from the tax cut, despite their symbolism for Labour’s “bread and butter” approach under Hipkins. Likewise, milk and meat are left out. Apparently, the reasoning for keeping the grocery tax cut to unprocessed fruit and vegetables is simply a matter of cost for Labour.

But in the future, some commentators foresee that Labour’s policy would set a precedent for further necessities to have GST removed – what about electricity, canned food, medicines, local government rates, and period products? The list goes on.

Enabling more super-supermarket profits

There is no doubt that Labour’s grocery tax cut could be electorally very popular. After all, households are hurting badly with cost-of-living expenses – over just the last three years fresh fruit and vegetables have gone up 23 per cent.

There was hope the Labour Government would help turn this around with bold reform of the supermarket sector, where consumer costs have been incredibly high due to just two companies – Foodstuffs and Woolworths – controlling the market. This largely unregulated duopoly has been allowed to continue despite Labour’s working groups, and thousands of words and promises to fix the uncompetitive market.

It’s in this context that Labour’s tax cut on fruit and veges is being made. And with the track record of these supermarkets and their price gouging, who would trust that giving supermarkets the power to decide whether to pass on the discounts is a good idea? If Labour had properly reformed this sector and made it competitive, then a drop of GST would have made more sense, as the chances of it being passed on would be greater. But Labour has failed to act on this.

It’s not just the supermarket retailers that are likely to pocket Labour’s tax cut. There will also be nothing to stop suppliers from increasing their costs. Again, without the Government implementing any great reform in this area, few consumers or economists can have faith that the food supply system is fit for purpose and able to pass the full cost of a tax cut onto consumers.

Working for Families tinkering

Labour also released another “cost of living” policy yesterday – to make Working for Families more generous via increasing the weekly in-work tax credit by $25 and the abatement threshold to $50,000, to take into account inflation and wage growth.

Again, critics have been rather underwhelmed by this announcement. Child Poverty Action Group said that such changes would do “nothing to help 200,000 of the country’s most impoverished children” because it won’t go to beneficiary families.

Others criticised Labour for holding back the abatement change until 2026. According to the Herald, Susan St John argues “the increase to the abatement threshold was insufficient now and was likely to be even more inadequate when the policy would be introduced in 2026 if wages increased further.”

The Electoral cynicism of this tax cut might rebound on Labour

Maybe none of the criticisms from experts really matter. Labour is trumpeting that the policy has cut through with voters. The party employed the polling and lobbying company Talbot Mills to get out information on the appeal of the policy before it was launched yesterday. Talbot Mills released their research to media, showing the policy had the support of two-thirds of the public. What’s more, the policy was shown to be especially effective in its appeal to swing voters, and even National supporters.

In contrast, the commentary on the new policy has been almost entirely negative, with many political journalists suggesting that the policy reflects poorly on the health and integrity of the Labour Government. Such verdicts could prove to be incredibly damaging to the party as it goes into the two-month campaign for re-election. When you lose the respect of virtually all opinion leaders – and potentially many party activists – a party risks a narrative forming that it’s time for a change of government. The smell of desperation isn’t attractive.

For example, the political editor of Stuff, Luke Malpass, is scathing today about Labour’s “craven desperation”, saying the tax cut “will be a contender for being the stupidest and most principle-free decision of a major party of this election campaign.”

And the political editor of Newshub, Jenna Lynch, sums up GST policy as Hipkins choosing “choosing tinkering over transformation”.

Today’s Otago Daily Times editorial is equally tough, saying that “Labour, disappointingly, is pumping for pure populism over sensible policy.” The newspaper’s editorial is titled “Desperate and disappointing Labour”, and accuses Labour and Hipkins of having “stooped to a disappointing low” in the “worst traditions of former prime minister Robert Muldoon”. They ask: “In the end, what does any party stand for if it is driven by polls and focus groups?”

Similarly today, Newsroom political journalist Marc Daalder says: “One has to wonder whether the Labour Party has replaced all of its policy staff with the reckons of a ChatGPT bot that has been fed a steady diet of Talbot Mills polling numbers and focus group transcripts.” Daalder suggests that Hipkins is now something of a hollow man, who will support any policy that helps him retain office, but that this makes him look “like any other cynical career politician.”

The GST announcement by itself wouldn’t be so damaging if it came after other transformative progress by Labour over the last six years. In particular, the fact that they are ruling out any other progressive tax reform, gives the GST policy a pathetic look. For those who wanted bigger and bolder changes, yesterday’s announcement will be demoralising and disappointing. And because it looks like a “subsidy for supermarkets”, it risks reminding many that Labour hasn’t carried out the thorough reform of this broken sector that was expected.

Herald business journalist Jenée Tibshraeny tweeted yesterday that the supermarket tax move is yet another example of New Zealand having to rely on broken markets to deliver the Government’s objectives: “Our heavy reliance on banks to stimulate, and now cool the economy via interest rate changes, is contributing towards their large profits. Now Labour wants to rely on supermarkets, which operate in an even more concentrated market, to deliver cost of living support”.

That sums up the situation – we still have very broken markets. And Labour is adding to this problem rather than fixing them. So yes, Labour’s GST policy might be electorally clever, but it’s also somewhat pathetic. Hence, what Labour might hope will save them, is more likely to help finish them off in government.

The Sixth Labour Government looks like it will end, not with a bang but with a failed Phil Goff policy from 2011. Unfortunately for Labour, the GST “supermarket subsidy” has the timidity to disappoint the left and is flawed enough to win the disdain of voters in the Centre.

Image credit: Tania Melnyczuk

Dr Bryce Edwards is the Political Analyst in Residence at Victoria University of Wellington. He is the director of the Democracy Project.