Debate rages over supermarket duopoly and abolition of GST on food

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Wellington, May 14, 2023

The National Party is not ruling out forcibly breaking up the supermarket duopoly but would rather find ways to encourage a “third entrant” to increase competition and keep prices in check.

Food prices are rising the fastest they have since the introduction of GST in the late 1980s, well ahead of most other sectors.

The cost of fruit and vegetables is leading the way, up more than 22% in the past year.

A poll last year found overwhelming support for removing GST from fruit and vegetables, and a Commerce Commission investigation concluded that the supermarket duopoly – Woolworths New Zealand and Foodstuffs was stifling competition but stopped short of recommending a forced breakup.

Breaking the duopoly

A Westpac report released on May 12, 2023 concluded that the government’s supermarket reforms, including an independent regulator, improving access to the wholesale market and collective bargaining for suppliers, would not deliver the hoped-for benefits – instead pushing for a breaking up of the duopoly.

Finance Minister Grant Robertson said that while it has been tough, many factors that influence food prices are out of the government’s hands.

“Particularly when you look at fruit and vegetables, where the weather is having an enormous impact, and the broader supply chain challenges,” he told RNZ ahead of this week’s Budget, which is expected to focus on easing cost of living pressures.

Speaking to Morning Report on Friday, National Party Finance Spokesperson Nicola Willis said that any break-up would need to be done “extremely carefully,’ or it risked raising prices in the short-term – the same warning given by the Westpac report.

“I worry about rash interventions that are well-intentioned but end up costing New Zealand shoppers more,” she said.

Before resorting to that, Ms Willis said that she was looking “really hard” at the barriers discouraging a big new player in the supermarket space.

“Is it our overseas investment rules? Is it our consenting framework? Is it these distribution issues? And I want policies that will encourage a third entrant into the market.

“I think that we do have a duopoly, and that’s not what I want for New Zealand in the long term.”

Freeing farmers from Wellington

Another way to reduce prices, she said, was to loosen regulations on farming – but not in ways that would reverse environmental gains.

“It is not about relaxing the rules. It is about not having rules that tell farmers exactly how to do it in their exact region with prescription and not enough flexibility for them to do it in the way that makes sense for their farm.

“Let us focus on the outcome that we want, which is cleaner water, less carbon, and let us not tell them exactly how to do that on their farm because the bureaucrat in Wellington does not have any idea,” Ms Willis said.

She said that farmers and vegetable growers to whom she had spoken, complain about “spending many hours every week up at night thinking about how they respond to the latest regulation, writing the new policy, responding to the email from the government department” instead of thinking up ways to expand their businesses.

National Party’s Finance Spokesperson Nicola Willis (RNZ Photo by Angus Dreaver)

Removing GST

Te Pāti Māori has a policy of removing GST from food, while others, including Labour, NZ First and The Opportunities Party have suggested similar moves in the past.

Prime Minister Chris Hipkins dismissed it as an option earlier this year, citing the complexity of such a change, but did not rule it out in the long term.

“It sounds very nice in principle, doesn’t it?” Lincoln University Professor of Agricultural Economics Alan Rennick told Morning Report on Friday.

“If we remove GST, it is 15% on fruits and vegetables. We are suffering high food price inflation at the moment; cut it and prices will fall by 15% and we will relieve some of that pressure,” he said.

Except that is not likely to happen, he explained.

At present, the tax “falls on both producers and consumers, so even if all the cut was fed through, it wouldn’t lead to a 15% fall in prices.”

And with just two major players, there would be no guarantee that the supermarkets would pass on the savings either, he said.

“What is interesting is that there is a $3.5 billion hole in our government funding. Where is that money going to come from? If you ask [voters] ‘shall we reduce the food tax and we will have less money to spend on schools, health, other factors as well,’ they may well have given a different answer,” he said.

Infometrics Economist Brad Olsen said last year that removing GST would also make food cheaper for the rich and introduce complexities to the tax system.

He said, “Low-income households spend proportionally more of their money on food than high-income households,” and hence they would benefit more, even if it also made food cheaper for the rich. But that would still not be a good enough reason to ditch GST, he argued.

“New Zealand [has] a very simple tax system because everything pays GST, and that is much easier to administrate,” Professor Rennick said.

“When you begin to exempt certain goods and services, it becomes much more complex and that is a problem because, collecting the tax costs more, it becomes more inefficient and it can have side effects on that as well.”

He said if the goal was to ease the cost of living for lower-income households, it would be better to leave GST as it is and simply give money to the needy.

“Some work, for example, has shown that if you collect the tax and then give a lump sum payment back to people, you will actually help lower-income households more than removing the tax.”

The above Report and pictures have been published under a special agreement with www.rnz.co.nz

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