Labour kicked off its election campaign with a pledge to remove GST from fruit and vegetables. It's an idea that's popular with the voters, but it's raised the eyebrows of tax experts and economists. The Detail takes a closer look at why there's been so much debate about it.
Fruit and vegatables. Photo: 123RF
It's not the first time we've debated the merits of GST, but this time the arguments over removing it from fruit and vegetables are much more fervent.
One of the tax experts who's spoken out against Labour's policy, Victoria University's Professor Lisa Marriott has a theory for that: it coincides with the high inflation and cost of living crisis.
"It's never really been something that people have taken a lot of notice of, I think mostly because nobody ever really thought it would ever actually be considered as a serious policy option," she tells The Detail.
Leaked ahead of Labour leader Chris Hipkins' announcement on Sunday, the policy has been picked over by tax experts and economists who've called it "depressing", "lacking in vision" and "one of the least cost effective ways of helping people who are struggling to feed their families".
They also argue the producer or the retailer will capture the tax saving, rather than the consumer, and it would be expensive and complex to administer.
But voters are embracing it, saying they would take anything that cuts the cost of their weekly shop and it would make it much easier to eat healthy.
Marriott takes The Detail back to 1 October 1986, when Labour's then-Finance Minister Roger Douglas introduced a 10 percent tax on goods and services, to replace an existing sales tax. It was part of a much broader package of reforms.
It was criticised at the time as a "regressive" tax that hit the poorest the hardest, because people on low incomes spend a higher proportion of their money on basic goods and services than wealthier people.
Today, one of the arguments against scrapping GST on fruit and vegetables is that poorer people will benefit least from it. Either way, they lose out.
Marriott explains why tax experts are against meddling with a tax that has been described as "pure" and "clean".
"We're very lucky in New Zealand because we do have a GST system that includes pretty much everything and the things that are not included are there for really good policy reasons and do make sense that they are not included," she says.
"Most countries do make concessions in order to get their GST implemented in the first instance. Unfortunately the minute you start tinkering with your GST system, and taking out certain things for social policy reasons, then you do lose a lot of the potential revenue that can be collected but also you get a lot of complexity."
It wouldn't be overly complex at an administrative level, Marriott says, simply requiring some reprogramming of software.
And she thinks there is a clear boundary on what would be included and excluded from the GST exemption: fresh and frozen, unprocessed fruit and vegetables. However, the carveouts have caused confusion in other countries, and there is potential for gaming of the system.
The Detail gets the Australian experience of GST carveouts for basic foods with Professor Alan Duncan, director of the Curtin Economics Centre in Perth.
"It's a real rabbit warren on exemptions and eligibilities," he says.
The exemptions – on a range of things including basic food, healthcare and education – were part of a deal John Howard's Coalition Government had to do with the Australian Democrats to get GST introduced back in 2000.
"It's very hard to give you in very simple terms what is exempt and what is not because the list is huge," Duncan says.
He says people don't take much notice of what's included and excluded, because the system has been in place more than 20 years.
Studies in Australia, however, have questioned the benefit of the exemptions when the layers and costs of compliance and administration are taken into account.
But Duncan tells The Detail Labour's policy shouldn't be dismissed.
He wants Labour to provide more information about its plan before people vote, and he thinks alternative policies should be explored.
"What else can you do, how much would it cost and what distributional impact might that have to address clearly the very significant cost of living concerns that many are facing in New Zealand."
Hear more about Australia's experience with GST by listening to the full podcast episode.
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