Why NZ must resist this GST siren call

NZ Prime Minister Chris Hipkins (R) and Finance Minister Grant Robertson. Picture: Getty Images.

From the vantage point of my earlier career at think tanks in London and Sydney, I have had front-row seats to the theatre of value-added tax (VAT) and goods and services tax (GST) policy lunacy. I have seen this seemingly innocent taxation mechanism morph into a clumsy beast, causing bureaucratic nightmares and economic distortions.

Which makes it all the more worrying for me to see New Zealand on the brink of making the same mistake.

It seems the Labour Party in New Zealand is currently flirting with the idea of removing GST from fresh fruit and vegetables.

How do we know? Because this plan has been leaked to the opposition. And when challenged about it, the government did its best not to rule it out.

In fact, they made it quite obvious they are contemplating it. Even Finance Minister Grant Robertson, who had previously opposed this nonsense (correctly), now stated his previous comments should be read “in context”. Yeah, right.

Such a GST move, presumably aimed at winning votes in the upcoming election, would come as an unnerving surprise. New Zealand, an island nation once known for its tax prudence, would be set to dive headlong into an administrative quagmire and economic distortion.

Removing GST from specific items, while seemingly benevolent, has far-reaching implications. It introduces administrative complexity, bordering on the absurd. The definition of what is and is not taxed becomes a battleground, sucking up legal resources and fostering market inefficiencies.

Removing GST from fresh fruit and vegetables is a adreadful idea.

Consider the thirteen years of litigation in the UK over whether a tea cake is a taxable biscuit or a tax-free cake. Or Australia’s infamous ‘ciabatta affair’, where experts were flown in from Italy to determine if a mini ciabatta was a taxable cracker or non-taxable bread. Each exemption creates its own distortionary circus of lobbying, litigation and loophole hunting. The main beneficiaries of such policies are tax lawyers.

And then, there are the economic distortions. Taxes are not just revenue collection tools, they shape behaviour. Each exemption nudges consumers away from taxed goods and towards untaxed ones. In a world with no GST on fresh fruit and vegetables, suddenly a fruit salad might become a smarter choice than a sandwich, not for health reasons, but for tax reasons.

You might argue that incentivising healthy choices is not such a bad thing, but remember, a tax system’s primary job is efficient revenue collection, not behaviour modification. In an ideal world, governments need to raise enough revenue to fund public goods without distorting markets or creating perverse incentives.

Indeed, New Zealand has done remarkably well at this so far, with its low and simple GST structure.

NZ Finance Minister Grant Robertson. Picture: Getty Images.

It has been an exemplar of good tax policy, way better than Australia’s GST, and one would hope any New Zealand government would intend to keep it that way.

New Zealand’s comprehensive and low GST, covering all goods and services, ensures that everyone contributes to the fiscal pot, whether they are spending on designer clothes, sports cars, or, yes, fresh fruit and vegetables. The country’s 15 per cent GST collects about as much revenue, relative to the size of the economy, as Hungary’s 27 per cent GST. Because New Zealand’s GST is clean.

But by creating an exception, the government not only jeopardises efficient revenue collection but also limits its spending power. In essence, it could end up with less money to spend on public services, including supporting low-income households – which would thus be a self-defeating proposition.

Also keep in mind that wealthier households typically spend more on everything, including food.

Taking GST off food means less revenue from those who can most afford to contribute. In effect, this could lead to a scenario where an attempt to lighten the tax burden for poorer households inadvertently benefits richer ones more.

It is also a great way of taxing consumption from forms of income that are harder to tax. If the government worries that rich people enjoy untaxed capital gains, it can at least know that consumption from that income draws GST. An own goal, especially for a Labour-led government.

While it is true that low-income consumers spend a larger share of their income on food, the solution would not lie in poking holes in the GST, but perhaps in adjusting income taxes. In fact, starting to inflation-index tax brackets – something that has not happened in New Zealand for years – would be a good start.

But the Labour Party, in what appears to be a bout of campaign desperation, risks forgetting these fundamentals of good tax policy. It is as though they are willing to bet that the public does not understand the intricacies and implications of GST exemptions. They probably do not contemplate the possibility that Kiwis might be smarter than that. Even the NZ Green Party opposes breaking GST.

Looking across the Tasman, the potential pitfalls if New Zealand heads down this path are clear to see. Nobody in Australia would claim that Australia’s GST madness would be an example worth following.

New Zealanders must resist the siren call of allegedly ‘simple’ GST exemptions. Alluring as it may be, following it would lead to dangers.

GST exemptions are anything but simple. The administrative headache, legal wrangling, and economic distortion they bring, are certainly not worth it.

A clean GST system is a remarkable beast when left untouched. But it becomes a monstrous nightmare when it is meddled with.

We can only hope that New Zealand’s clean GST survives the current government and the 2023 election.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative

(www.nzinitiative.org.nz).