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Analysis: The rumours were true. On Sunday, Labour announced its tax policy for the upcoming election: GST off fresh and frozen fruit and vegetables. It will also increase the Working for Families in-work tax credit by $25 and increase the abatement rates – the salary level at which workers start to lose eligibility to transfers. This is the most sensible part of their announcement, so of course it won’t happen until 2026.
The GST exemption is a rotten policy: a bowl of overripe bananas and decomposing apples of a policy. We know this because in 2017 Labour convened a tax working group headed by former Labour Finance Minister Sir Michael Cullen, and directed it to investigate New Zealand’s GST regime, with an eye to the possibility of exempting some subsets of goods like food or other essentials.
Cullen’s group strongly advised against this, finding such exemptions were “complex, poorly targeted for achieving distributional goals and generate significant compliance costs. Furthermore, it is not clear whether the benefit of specific GST exceptions are passed on to consumers.”
If the government wanted to help people on low incomes buy food, it concluded, it was cheaper and easier to just give them the money. But Labour doesn’t want to help people on low incomes buy food: it wants to win the election, and it has briefed the parliamentary press gallery that GST-exempt food polls extremely well, especially among swing voters.
Everyone knows political parties use polls and focus groups: that’s just the way modern politics works. But this is the first time – that we know of – one of our major parties has done something they know is stupid merely because their pollsters told it to: it feels like a low point, both for Labour and our political system.
We’ve been told that the complications of implementing the policy will be addressed by another tax working group, which will figure out the details of the reform that the last working group specifically told them not to do. The government’s new grocery commissioner will allegedly ensure that the savings are passed on to customers and not simply absorbed by the supermarket duopoly, although the mechanisms of this enforcement remain extremely vague.
When Chris Hipkins announced these new policies he revealed that they are part of a 10 point cost of living plan:
- The first two steps are bringing inflation under control and growing wages so families can get ahead.
- The next three steps were announced in this year’s Budget – free prescriptions, cheaper childcare with 20 hours free Early Childhood Education (ECE) extended to two year olds,
- and making public transport permanently free for under 13s and half priced for under 25 year olds.
The Reserve Bank is in charge of bringing inflation under control (and is doing a poor job of this) and growing wages is inflationary. But I imagine the subsequent policies – free ECE, free prescriptions, cheaper transport – were popular with focus groups. If you offer people free stuff they’ll generally shrug and take it. But back in 2011 Labour ran on GST-exempt food, and National ran on partially privatising the power companies. A wildly popular policy versus a deeply unpopular one, and National won. Almost as if there’s more to politics than doing whatever the focus groups say.
Back in February, Treasury warned the government that its planned extension of the ECE subsidy would deliver poor value for money because the sector wasn’t competitive: the subsidy would just be absorbed by the providers. The policy went ahead anyway, because its purpose was not to deliver childcare but to buy votes. But Labour has lost about 100,000 votes since then. Free stuff is not translating into electoral success. Perhaps voters are intuiting that these policies often destroy value rather than help them get ahead: that all this free stuff isn’t really free.
The current income tax settings haven’t shifted since 2010 – with the exception of an additional top rate – and as inflation drives wage growth this carries us all up into higher brackets. The average earner is paying about $6000 more in tax every year and in return they’re getting $5 off prescriptions; and now fractionally cheaper beans – if the savings are passed on. It’s a terrible deal. But by promising not to make significant changes to the tax system Labour has boxed itself into it.
Hipkins and his Finance Minister Grant Robertson can effortlessly blag their way through interviews and debates selling this tax framework, and by the end of the campaign they’ll half believe in it themselves. But by campaigning on it they’re betting against the intelligence of the electorate. It’s the worst bet a political party can make: even if they win we all lose.
