Who would profit most from Labour’s GST-exemption policy? It won’t be those struggling with the cost of living – the average shopper is unlikely to see any real change in supermarket prices if Chris Hipkins was to implement his tax-off fresh and frozen fruit and vegetables.

The real winner would be the supermarket company duopoly who will pocket most of the GST exemption, along with supermarket lobbyists, the lawyers, accountants and public servants who would be in demand to administer and fight over the tax rules. Even if there is a trickle-down in reduced fruit and vege prices, economists say most of this will be disproportionately enjoyed by wealthier shoppers.

What’s more, Hipkins has reiterated there would be no new capital gains or wealth taxes, and he’s announced that income tax rates also won’t be changed by Labour.

This all comes in the context of heightened concern and awareness about the massive inequalities and dysfunction in the tax system and economy. Hence although Labour thinks it has just announced a big and popular election policy that will help those struggling, for many it will serve to reinforce that Labour has spent six years in power doing little but helping the wealthy and Wellington professional managerial class look themselves.

Why GST off fresh food will help the rich more than the poor

Labour is budgeting $500m per year on this tax cut. But how much of that will end up in consumer pockets? And how much will end up with poorer citizens?

The consensus amongst economists seems to be that when such tax exemptions are introduced, companies avoid passing the bulk of the savings onto consumers. Labour’s own 2018 Tax Working Group concluded that only about 30 per cent of tax cut normally gets passed on. The rest goes into increased profits.

There are plenty of overseas examples of this. Today, economist Brad Olsen told Newshub: “We’ve seen when the UK, for example, removed their version of GST off eBooks, you go forward a few years, eBooks are more expensive than they were before, there was no actual reduction in that tax… We saw as well the likes of period products in the UK when they had their GST rating changed, again, only about 20 percent of the change was actually passed on to consumers.”

The Herald has calculated that the average household would save just $2.21 a week, or $115 a year, from Labour’s tax cut.

Labour’s answer to this is the establishment of a “Grocery Commissioner” who can essentially patrol the aisles checking that the GST discount is really being passed on to consumers. But such a promise has done little to impress commentators who can’t see it being effective, but instead just more bureaucracy.

Economists also say that where GST savings are passed onto consumers, this benefits the rich, who spend more on fresh fruit and vegetables. Again, Olsen explained this today: “We know removing GST removes it for everyone, millionaires, people who obviously don’t need that support and because those households actually spend a lot more dollar for dollar on the likes of fruit and vegetables, those upper-income households actually get a lot more from this policy on a dollar basis”.

For this reason, Labour’s tax cut is being criticised by poverty and public health experts. Economist Susan St John of Child Poverty Action Group says the tax cut is “rather meaningless” because it gives the least benefit to those who need it the most. Likewise, Dr Sally Mackay, a food expert at Health Coalition Aotearoa is reported as believing “the policy was not evidence-based, gave a negligible level of saving and was unlikely to alter spending choices.”

Economists say if Labour really wanted to make a difference to those who are struggling, they could much more effectively and efficiently just give the $500m to the poor.

There’s nothing progressive about making the tax system more complex

Labour has promised to establish a working group which will adjudicate on what fruit and vegetable products should be exempt from tax. There will be plenty of debates, and possibly legal battles, over what should qualify under Labour’s rules.

And, of course, there will be greater debate about what the rules should be. At the moment, Labour has decided not to include other foods. Bread and butter, for example, are excluded from the tax cut, despite their symbolism for Labour’s “bread and butter” approach under Hipkins. Likewise, milk and meat are left out. Apparently, the reasoning for keeping the grocery tax cut to unprocessed fruit and vegetables is simply a matter of cost for Labour.

But in the future, some commentators foresee that Labour’s policy would set a precedent for further necessities to have GST removed – what about electricity, canned food, medicines, local government rates, and period products? The list goes on.

Enabling more super-supermarket profits

There is no doubt that Labour’s grocery tax cut could be electorally very popular. After all, households are hurting badly with cost-of-living expenses – over just the last three years fresh fruit and vegetables have gone up 23 per cent.

There was hope the Labour Government would help turn this around with bold reform of the supermarket sector, where consumer costs have been incredibly high due to just two companies – Foodstuffs and Woolworths – controlling the market. This largely unregulated duopoly has been allowed to continue despite Labour’s working groups, and thousands of words and promises to fix the uncompetitive market.

It’s in this context that Labour’s tax cut on fruit and veges is being made. And with the track record of these supermarkets and their price gouging, who would trust that giving supermarkets the power to decide whether to pass on the discounts is a good idea? If Labour had properly reformed this sector and made it competitive, then a drop of GST would have made more sense, as the chances of it being passed on would be greater. But Labour has failed to act on this.

It’s not just the supermarket retailers that are likely to pocket Labour’s tax cut. There will also be nothing to stop suppliers from increasing their costs. Again, without the Government implementing any great reform in this area, few consumers or economists can have faith that the food supply system is fit for purpose and able to pass the full cost of a tax cut onto consumers.

Working for Families tinkering

Labour also released another “cost of living” policy yesterday – to make Working for Families more generous via increasing the weekly in-work tax credit by $25 and the abatement threshold to $50,000, to take into account inflation and wage growth.

Again, critics have been rather underwhelmed by this announcement. Child Poverty Action Group said that such changes would do “nothing to help 200,000 of the country’s most impoverished children” because it won’t go to beneficiary families.

Others criticised Labour for holding back the abatement change until 2026. According to the Herald, Susan St John argues “the increase to the abatement threshold was insufficient now and was likely to be even more inadequate when the policy would be introduced in 2026 if wages increased further.”

The Electoral cynicism of this tax cut might rebound on Labour

Maybe none of the criticisms from experts really matter. Labour is trumpeting that the policy has cut through with voters. The party employed the polling and lobbying company Talbot Mills to get out information on the appeal of the policy before it was launched yesterday. Talbot Mills released their research to media, showing the policy had the support of two-thirds of the public. What’s more, the policy was shown to be especially effective in its appeal to swing voters, and even National supporters.

In contrast, the commentary on the new policy has been almost entirely negative, with many political journalists suggesting that the policy reflects poorly on the health and integrity of the Labour Government. Such verdicts could prove to be incredibly damaging to the party as it goes into the two-month campaign for re-election. When you lose the respect of virtually all opinion leaders – and potentially many party activists – a party risks a narrative forming that it’s time for a change of government. The smell of desperation isn’t attractive.

For example, the political editor of Stuff, Luke Malpass, is scathing today about Labour’s “craven desperation”, saying the tax cut “will be a contender for being the stupidest and most principle-free decision of a major party of this election campaign.”

And the political editor of Newshub, Jenna Lynch, sums up GST policy as Hipkins choosing “choosing tinkering over transformation”.

Today’s Otago Daily Times editorial is equally tough, saying that “Labour, disappointingly, is pumping for pure populism over sensible policy.” The newspaper’s editorial is titled “Desperate and disappointing Labour”, and accuses Labour and Hipkins of having “stooped to a disappointing low” in the “worst traditions of former prime minister Robert Muldoon”. They ask: “In the end, what does any party stand for if it is driven by polls and focus groups?”

Similarly today, Newsroom political journalist Marc Daalder says: “One has to wonder whether the Labour Party has replaced all of its policy staff with the reckons of a ChatGPT bot that has been fed a steady diet of Talbot Mills polling numbers and focus group transcripts.” Daalder suggests that Hipkins is now something of a hollow man, who will support any policy that helps him retain office, but that this makes him look “like any other cynical career politician.”

The GST announcement by itself wouldn’t be so damaging if it came after other transformative progress by Labour over the last six years. In particular, the fact that they are ruling out any other progressive tax reform, gives the GST policy a pathetic look. For those who wanted bigger and bolder changes, yesterday’s announcement will be demoralising and disappointing. And because it looks like a “subsidy for supermarkets”, it risks reminding many that Labour hasn’t carried out the thorough reform of this broken sector that was expected.

Herald business journalist Jenée Tibshraeny tweeted yesterday that the supermarket tax move is yet another example of New Zealand having to rely on broken markets to deliver the Government’s objectives: “Our heavy reliance on banks to stimulate, and now cool the economy via interest rate changes, is contributing towards their large profits. Now Labour wants to rely on supermarkets, which operate in an even more concentrated market, to deliver cost of living support”.

That sums up the situation – we still have very broken markets. And Labour is adding to this problem rather than fixing them. So yes, Labour’s GST policy might be electorally clever, but it’s also somewhat pathetic. Hence, what Labour might hope will save them, is more likely to help finish them off in government.

The Sixth Labour Government looks like it will end, not with a bang but with a failed Phil Goff policy from 2011. Unfortunately for Labour, the GST “supermarket subsidy” has the timidity to disappoint the left and is flawed enough to win the disdain of voters in the Centre.

The supermarket sector is finally about to receive some serious government intervention. Following a scathing report from the Commerce Commission, it’s now almost inevitable that the Labour Government is going to have to introduce some major changes to this vital but uncompetitive retail sector. And these moves are likely to be popular.

The report, released on Thursday, met with almost universal praise and celebration. And it surprised everyone with just how scathing it was about the supermarkets, and how radical its early recommendations are.

The first key point the supermarket sector report makes, is that the current groceries sector is utterly broken. It paints a picture of a Foodstuffs and Woolworths duopoly making super-profits – in excess of 20 per cent return on their capital – by ripping off both food suppliers and customers. The report found that food prices are the sixth highest in the OECD. Staff, too, are heavily exploited to help make billions of dollars in profits.

The second key point is the possible suite of reforms that will be necessary to fix the sector. These range from encouraging supermarkets to reform themselves, through to serious state intervention to break up the mega-entities that control the market, or even the state setting up a third supermarket chain (in the way that KiwiBank was introduced).

One of the first media articles on the report on Thursday explained that expectations for the announcement were quite low, and some were ready to be disappointed – see Hamish Rutherford’s The Commerce Commission heaps pressure on Government to deliver supermarket changes (paywalled). He says that “The supermarkets appeared shocked by the report.”

Rutherford summed up the reform options: “The Commerce Commission’s recommendations for measures to improve wholesale competition are a spectrum, ranging from modest changes on a voluntary basis, to creating a new wholesaler or even forcing the break-up of the groups into retail and wholesale. Aimed at attracting a new major retailer into the New Zealand market, it could be accompanied by forcing the supermarket to sell off certain sites to a new player.”

The mood for a more interventionist state in broken markets

In the above article, Rutherford also explains that such a scathing and radical report really puts pressure on the Labour Government and the Commerce and Consumer Affairs Minister David Clark to actually carry out some substantial reforms. Rutherford concludes: “with such a clear verdict of a duopoly exercising market power in such a mammoth sector, the Government will quickly need to find a suitable response.”

Stuff newspapers political editor Luke Malpass also emphasised how the report squarely puts the ball into the Government’s court, making it almost impossible for them to avoid doing something big. He says that normally these types of reports take the pressure off governments: “Market studies are great for governments. If nothing else, a Commerce Commission probe creates the appearance of government action long before the action happens”, but given the tenor of this particular report, “the Government will have to actually do something this time around” – see: Labour’s $22 billion supermarket problem — and opportunity.

According to Malpass, David Clark is a good fit for this role (better than the ill-fated Health portfolio), and he’s inclined towards proper reform: “His view is simple: Labour campaigned on doing this, he thinks that there is a mood for real change, and now it will be up to the Government to get on with it.”

Government intervention is also likely to be substantial, Malpass points out, because there’s now a strong public philosophical mood for the state to act: “This political landscape has changed massively from five years ago. There seems to be a pretty good public appetite for the Government to sort some of these things out. If anything, Labour’s only downside risk here is not doing enough. And if Covid has taught us anything, it’s that – rightly or wrongly – Kiwis are quite happy for governments to intervene in the right circumstances. In the coming cost-of-living political war, the party that convinces voters it is the one on their side will be rewarded.”

This mood for a bigger and more interventionist state, especially in regard to the broken supermarket sector, is very well examined by Max Rashbrooke in his column, Supermarket prices: Politicians have dropped the ball, which begins like this: “The forensic evisceration on Thursday of our uncompetitive supermarket duopoly is a landmark moment, a sign of shifting attitudes towards capitalism – and a massive test for Commerce Minister David Clark.”

According to Rashbrooke, Clark has a big job ahead, and will have to resist “a determined lobbying campaign by the supermarket duo”, but ultimately will achieve his own redemption if he can create a legacy as the Minister “who broke up the big two”. And the fact that he even has this task is a sign that the “laissez-faire thinking” of the past that allowed the market to evolve into a duopoly is out of fashion.

Rashbrooke points to other broken sectors that will also need reform, including electricity, building supplies (where “Fletchers utterly dominates”), petrol, and banking. And he suggests that in the new environment, National is likely to be onboard with radical reform, “because conservatives need capitalism to work properly and retain the public’s support.”

Economist Cameron Bagrie also thinks the Government has a strong incentive to go hard on supermarkets, and that the construction sector and banking should be next – see: Supermarkets are sitting ducks for pro-competition regulation (paywalled). He notes the Government is building up the Commerce Commission’s capacity, budgeting “$30.4 million extra for the commission over three years, and $13.9m per year thereafter.”

Bagrie believes that reform of the grocery sector will be favoured by Government because rising inflation is “not likely to be economically or voter-friendly”, and “Moving on supermarkets could help around the edges to contain inflation.”

Media commentators are also keen for the Government to deal to the supermarkets. Heather du Plessis-Allan says she’s hoping for big reforms to increase supermarket competition but is not sure this will happen, especially given that promised reforms in the petrol market don’t appear to have worked – see: We pay too much for groceries.

She says reform will be difficult, but electorally rewarding: “The easy option is to force the supermarket chains to supply a third player with wholesale groceries at reasonable prices so they can compete. The hard option is force the supermarket chains to sell off some of their stores or brands. Either way, this will kick up a storm in the sector. The Government will buy itself a fight. Does it have the courage? I’d like to see it go hard. I think there’s public support from frustrated shoppers.”

Similarly, Kerre McIvor is sceptical of reform eventuating, but says it would be popular: “waving a stick at big international companies and millionaire supermarket owners is good for votes from families doing it tough, and if this Government knows anything, it’s how to capitalise on populist causes. The big two would be sensible to take this report, and its recommendations, very seriously” – see: The supermarkets should take ComCom report seriously (paywalled).

Newspaper editorials are also favourable to reform. The New Zealand Herald’s editorial said the report findings “are unsurprising”, but “What’s important is what happens next” – see: Smashing the supermarket duopoly is a safe bet for Labour (paywalled). The newspaper says “with inflation on the way voters are sure to be supportive of any measures to increase competition.”

The Otago Daily Times argues that the reforms must be radical: “consumers, suppliers, and potential new retailers will be expecting the Government to do something more than tinker” – see: Supermarket changes unknown.

Although a lot of reform conversation is about helping assist a third supermarket chain into the market, the ODT says greater regulation of current grocery store pricing is also required: “Questions are already being raised about whether an extra big player or two would necessarily make the improvement sought without some sort of control of the margins on grocery items.”

Marketing lecturer Robert Hamlin, from the University of Otago, is also being reported as advocating regulation above what is required to get a third grocery chain into the market – see RNZ’s Strong regulation needed to counter supermarket price gouging – marketing expert.

He also believes that government price controls must be introduced, arguing supermarkets are “like a power company, they’re essential to modern living, and it’s important that they should be regulated to make sure that they actually do deliver”. Hamlin argues there’s a need for a dedicated senior Minister in charge of supermarkets, rather than just an independent regulator: “I would imagine there will be a call for an independent regulatory authority… that would be a very poor idea because I doubt if it would stay independent for very long – that it would be captured by the people it’s supposed to be being regulated by.”

Calls for a Telecom-style breakup of the supermarket duopoly

Many commentators are drawing parallels between the state of the supermarkets and how the Telecom monopoly was broken up in the mid-2000s. For the best argument in this regard, see Ernie Newman’s column, Supermarkets – the Telecom parallel (paywalled).

Newman, who was once the head of the Technology Users Association of NZ, and now advises the Food and Grocery Council, is emphatic about the need for a break-up being forced on the supermarkets, starting his column like this: “Like cracking open an egg and finding it rotten, the Commerce Commission has exposed in one dramatic report the ugly reality of market power abuse in our supermarket sector.”

He argues that the split up of Telecom and major reforms to the telecommunications market quickly brought about huge benefits for the consumer, and the same can happen with groceries: “So can consumers, and grocery suppliers, expect a similar outcome from this action against supermarkets? Emphatically yes. The core problem is the same – blatant abuse of extreme market power. The detail is different, but arguably less challenging in the distribution sector which is about trucks and real estate, unlike the technology sector grappling with massive and continual technological changes.”

However, business journalist Bernard Hickey is much less sure. He says the Commerce Commission report is “a detailed, meticulous and cracking read” but dissents from the growing chorus who suggest big structural reforms could be easily implemented – see: Don’t bet on a breakup.

Here’s Hickey’s main point: “Unlike Telecom, which was a locally-listed and a former state-owned network monopoly that could be relatively easily broken in two with legislation, a share split and a couple of minor regulatory tweaks, the two supermarket chains’ ownership structures (two cooperatives with individually owned supermarkets and an Australian-owned corporate) mean they would both be fiendishly complicated to unravel and replicate with legislation and simple corporate action.”

Land reform to help new supermarket rivals

One of Hickey’s preferred fixes involves helping foreign chains enter the market with “accelerated RMA help for [property] sites or overseas investment exemptions, which should be expedited.”

This is because the Commerce Commission report shines a light on the problem for new supermarket companies face acquiring property for stores. Suitable land is hard to get, and this is partly due to a lot of council and resource management rules and processes, but also because of strategic actions by the existing grocery companies in blocking site availability. This is all explored in Dileepa Fonseka’s Pulling out all the stops to get a new supermarket player into the market.

For more on this, see Eric Crampton’s Why it’s hard to open a supermarket in NZ. He explains that a lot of suitable sites for new supermarkets have contracts that prevent them being used for this purpose: “Existing supermarkets either own those sites already, or previously owned them and sold them off with encumbrances on the title restricting any future owner against using the site as a supermarket, or the site is part of an existing shopping centre where the supermarket has an exclusivity restriction.”

See also, Crampton’s column, KiwiGrocer is a classic Catch-22.

KiwiShop: “Where everyone is at the front of the queue”

Probably the most contentious and interesting reform option put forward by the Commerce Commission is the government establishment of a supermarket chain. Max Rashbrooke comments on this, saying “Though I can’t see the state running a supermarket well in the long term, this could be the short-term circuit breaker we need. The risks would require careful assessment, but the benefits to consumers and suppliers would probably be substantial.”

For a much more enthusiastic embrace of this idea, see Martyn Bradbury’s Why we urgently need a State owned supermarket.

The way that such a “KiwiShop” would operate is sketched out further today by marketing specialist Associate Professor Mike Lee of the University of Auckland, who says that such an idea could be as successful as KiwiBank, but operating more as a not-for-profit public service – see: Subsidies not soft drinks: The brave new world of Kiwishop (paywalled).

He argues that when the market fails, the government needs to enter: “Governments need to step in when systems fail, or when the profit incentive of the major players result in poor levels of wellbeing for the population. That’s why governments get involved in public housing, public transport, public education, and public health. So why not try public retailing?”

Lee envisages a KiwiShop that employs welfare beneficiaries, trains them up, prioritises the sale of New Zealand goods, and doesn’t sell harmful products (such as cigarettes and soft drinks).

In contrast, Herald business commentator Kate MacNamara says the KiwiShop-type idea is “risible”: “For one thing, it conjures alarming visions of the Prime Minister’s chiding hand on your supermarket trolley steering it firmly away from the biscuit aisle (renamed ‘occasional treats’ and cordoned off before mid-afternoon)” – see: The problem of supermarkets’ power and Government’s attitude to competition (paywalled).

Chris Trotter says it’s not going to happen anyhow. He says that David Clark and his colleagues are allergic to such “democratic socialist” ideas, which would be seen as too much of a threat to capitalism – see: The Sin of cheapness.

Finally, not everyone is convinced that the supermarket sector is even broken and in need of reform. Mike Hosking says that the “report found fault for no other reason than all reports find fault”, and the problems of the current market are because: “It’s not easy doing business at the bottom of the world with a small population and a weird geography” – see: Nothing will change from the supermarket inquiry.