GST on/off food
The question of whether GST should be removed
from food has been raised in the media and by
political parties a number of times over recent years.
The objective being to improve the diet and wellbeing
of lower socio-economic groups within
society.
The idea seems reasonable and is likely to
resonate with the
“reasonable” person
on the street, if only
from a perspective of
fairness and equity.
But would it work? A
recent Treasury report
has shed some light
on the issue and
some key messages
from the report have
been outlined below.
The report provides that the proportion of a family’s
food budget does not increase at the same rate as
incomes rise. Therefore, an equity argument exists
for the rate of GST on food to be reduced. However,
given that high income earners spend more on food
in an absolute sense, they would actually benefit
more from a blanket food exemption.
In addition, to ensure the tax generated from GST
remains the same, the GST rate on other items
would need to increase by an estimated 2%. This
evidences a further flaw in trying to achieve social
aims by manipulating GST. The rate can’t flex based
on a person’s individual circumstances, the same
way that income tax rates do. The rate applies to
goods (and services) irrespective of the person
buying them.
In addition, to ensure the tax generated from GST
remains the same, the GST rate on other items
would need to increase by an estimated 2%. This
evidences a further flaw in trying to achieve social
aims by manipulating GST. The rate can’t flex based
on a person’s individual circumstances, the same
way that income tax rates do. The rate applies to
goods (and services) irrespective of the person
buying them.
No consideration is given to a more targeted
reduction in GST, such as in Australia where certain types of food are not subject to GST, such as bread,
flour, sugar and milk. While other items such as
biscuits, cakes and takeaways are subject to GST.
Research led by the University of Auckland found
that taking GST off fruit and vegetables led
shoppers to buy about half a kilogram more fruit and
vegetables, per household, each week.
One argument for keeping the status quo is that
New Zealand’s system is simple and efficient. The
broad based approach avoids the complexity and
compliance costs that arguably exist under other
regimes; such as Australia’s.
The pressure on the New Zealand Government to
introduce an exemption on food will only increase if
GST increases. However, it is important to ensure
any decision is based on rational debate and
certainty that it will have the desired outcome,
thereby outweighing any associated costs.