Cost of living: What's the best way to bring down food prices?

A Commerce Commission investigation concluded the supermarket duopoly - Woolworths NZ and Foodstuffs - was stifling competition.
A Commerce Commission investigation concluded the supermarket duopoly - Woolworths NZ and Foodstuffs - was stifling competition. Photo credit: RNZ.


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. Fruit and veges are leading the way, up more than 22 percent in the past year.

A poll last year found overwhelming support for removing GST from fruit and vegetables, and a Commerce Commission investigation concluded the supermarket duopoly - Woolworths NZ and Foodstuffs - was stifling competition, but stopped short of recommending a forced break-up.

A Westpac report released today concluded 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 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 on there, and the broader supply chain challenges," he told RNZ ahead of next 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 any break-up would need to be done "extremely carefully", or it risked raising prices in the short-term - the same warning the Westpac report had.

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

National Party deputy leader Nicola Willis
National Party deputy leader Nicola Willis Photo credit: RNZ

Before resorting to that, Willis said 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's not about relaxing the rules. It's 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's focus on the outcome we want, which is cleaner water, less carbon, and let's not tell them exactly how to do that on their farm, because the bureaucrat in Wellington doesn't have any idea."

She said farmers and vegetable growers she has spoken to 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.

Removing GST

Te Pāti Māori has a policy of removing GST off 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's 15% on fruits and vegetables. We're suffering high food price inflation at the moment; cut it and prices will fall by 15 percent and we will relieve some of that pressure."

Except that would be very unlikely 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 percent fall in prices".

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

"What is kind of interesting also ... that's a $3.5b hole in our government funding. Where's 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."

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

Rennick said "low-income households spend proportionally more of their money on food than high-income households" so 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's much easier to administrate," Rennick said.

"When you begin to exempt certain goods and services, it becomes much more complex and that is a problem because then 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."