There has been quite a bit of fuss of late about GST on fresh fruit and vegetables. The Maori Party’s Rahui Katene put forward a private members bill that would have exempted healthy food from GST, and more recently Labour has announced that will remove GST from fresh fruit and vegetables.
Reasons for removing GST off particular foodstuffs vary but tend to fall under two main headings: “struggling” families need a break to be able to afford good quality food; and removing GST on fresh fruit and vegetables will encourage people to eat more of them, and this will be better for their health.
These are worthwhile goals in themselves. The question is, will removing GST off fruit and veges achieve them?
Before answering that, we need to consider what removing GST would mean in practice. At present New Zealand’s GST captures everything except housing, rents and financial transactions, all of which can be ignored for our purposes. This universal application makes administration easy for both IRD and businesses processing GST returns, and it means organisations don’t waste time trying to squeeze their service or product into a GST-exempt category to gain a competitive price advantage. This saves everyone time and money.
The trade off is that GST is regressive. Because GST is an across-the-board tax, everyone pays the same GST on a carton of milk so low-income households pay more GST as a proportion of their income than higher income households. Taking GST off fruit and vegetables does not make it ‘less regressive’ – on the contrary because high-income households are more likely to buy fresh fruit and vegetables it further tips the scales in their favour. How do we know this?
The 2003 Children’s Nutrition Survey[i] found that children in low-income families ate less fruit and vegetables. More recent research done for the Families Commission[ii] also found that low-income households ate fewer fruit and vegetables, and that buying more would be difficult on their current budgets. Conversely, the Auckland Regional Public Health Service[iii] has shown that junk food outlets are more likely to be found in low-decile suburbs.[iv] Here’s why: if, at the end of the week, there’s $5 to feed the family, do you buy carrots and lean chicken breast or a loaf of cheap bread and some greasy chips? Carrots might be better for the kids but they’ll complain about being hungry. On the other hand, children love those cheap chicken nibbles.
Going back to the $5. Suppose a loaf of bread costs $1. That leaves $4. Suppose vegetables are GST exempt, that means they cost $3.48, that is an additional 52c is available to spend on food. That’s the equivalent of about an apple. For $4, the choice is hot chips, or some fresh veges and an apple. Only one of these is guaranteed to be childproof – ergo, chip butties it is!
The problem is not the absolute price of fresh fruit and vegetables, it’s that even if they are GST exempt the price difference between healthy food and less healthy food means many households will continue to purchase less healthy food. As well, there is now a lot of evidence that here is people on low incomes tend to purchase calorie dense foods with the money they have available. These foods are high in fat, and often highly processed with little or no nutritional value. This is a major contributor to obesity and overweight in low-income people because they, quite rationally, buy as many calories as they can for their money.[v] Junk food may have little nutritional value, but that doesn’t matter if the goal is to feel full.
Nor does removing GST address the important issue of socioeconomic inequality. Obesity rates are higher in countries with high rates of income inequality as measured by the Gini coefficient.[vi] The graph below plots obesity rates of OECD countries against their Gini coefficient.[vii] The trend line shows that there is a correlation (0.6) between income inequality and obesity. (Note this is only obesity, not obese and overweight.)
Food is more than just fuel, it is also a comfort and a treat. People on low incomes are more likely to be stressed, and for them junk food that is engineered to taste good is stress relief, and perhaps even be an affordable luxury.
Until we attend to issues of low absolute levels of income that favour the purchase of cheap bad food, and high levels of income inequality that are correlated with high levels of stress and associated overweight and obesity, then we might as well collect the GST off fruit and vegetables and use it for something socially useful. The relative prices of fresh fruit and vegetables and poor quality food is such that removing GST off fresh food might change the buying patterns of a few individuals and families on the margins, but will not significantly alter the buying habits of low-income households.
This should not be taken as an argument that all poor people eat junk because they don’t know any better or can’t cook. Most families are perfectly aware of basic nutrition, but low incomes restrict their food choices. The Families Commission research found that low-income families were no different from other groups when it came to planning, cooking and eating meals.
Two other points are relevant here. The first is that, for the reasons above, attempts to prevent beneficiaries buying junk food by issuing them with so-called ‘smart cards’ won’t work. Beneficiaries will quickly find ways to circumvent the system, and as anyone who has watched food stamps being misused can attest, retailers are perfectly happy to help them. It is also incorrect to assume that only beneficiaries have low incomes, and patronising to assume only they are incapable of making ‘sensible’ food choices.
The second is the argument that New Zealand is one of the few countries in the developed world that doesn’t make some GST exemptions for food. If that made a difference we would expect our problems – poor food purchasing choices by low-income families, heart disease and high densities of junk food outlets – to be unique. But they’re not. Other countries are struggling with the same issues and the medical consequences of high rates of obesity. The UK, which has food exemptions on VAT, has higher rates of obesity that New Zealand, and equally low rates of fresh food consumption. In the US, the fattest country in the world, millions are now dependent on food stamps, and sales tax exemptions are not making a shred of difference to food affordability or the problems associated with unhealthy diets. If removing GST made a real difference, we would expect other countries to be eating better than us, but they’re not.
Eating habits are a complex mix of learned behaviour, education, food preparation and cooking skills, cultural expectations, food availability and affordability, income, expectations, and personal preferences. Playing around the margins of one small aspect of this mix – price – is unlikely to move those habits. Policies need to address the harder issues of income and socioeconomic inequality to begin to make a difference.
[i] Ministry of Health. 2003. NZ Food NZ Children: Key Results of the 2002 National Children’s Nutrition Survey. Wellington: Ministry of Health.
[ii] Smith, C, W Parnell, and R Brown. 2010. Family Food Environment: Barriers to Acquiring Affordable and Nutritious Food in New Zealand Households. Wellington: Families Commission Blue Skies Report 32/10.
[iii] Auckland Regional Public Health Service. 2006. Improving Health and Well-being: A Public Health Perspective for Local Authorities in the Auckland Region. Auckland: Auckland Regional Public Health Service.
[iv] Here ‘junk’ means highly processed food that is high in some combination of fat, salt and sugar.
[v] Drewnowski, A, and N Darmon. 2005. The Economics of Obesity: Dietary Energy Density and Energy Cost. American Journal of Clinical Nutrition 82(suppl):265S-273S.
[vi] The Gini coefficient is a measure of income inequality. I is perfect inequality, 0 is perfect equality. Most OECD countries have a Gini coefficient of 0.2-0.4, with higher numbers being more unequal.
[vii] Two outliers have been taken out: Japan because with an obesity rate of about 3% it is well outside the normal OECD range, and diet is a big factor; and Turkey because it exhibits a Gini coefficient that is more consistent with a developing economy.
© Donna Wynd 2010
Donna Wynd is chief research and policy analyst for the Child Poverty Action Group. She was co-editor of CPAG’s cornerstone report Left Behind: How social and income inequalities damage NZ children (2008) and the author of CPAG’s report on foodbank use in NZ, Hard to Swallow, along with many other submissions, articles and presentations for CPAG and others.
She has a background in law and economics, and also represented New Zealand in cycling at the 1996 Olympics.