Economist Brian Easton says public policy frequently suffers because we don’t look at alternatives

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Thus far the Labour Party’s only ‘new’ election (economic) policy is to remove GST from fruit and vegetables.

Even the accompanying promise of adjusting Working for Families is much in line with what it has being doing in the last six years. It is also an acknowledgement that the government has not been able to improve the scheme despite an almost universal agreement by the knowledgeable that the sixteen-year-old scheme is neither efficient nor equitable. The Key-English Government could not solve the conundrum either. The promise to offer free dental care for under 30-year-olds is also an extension of past policies.

That suggests that Labour’s positive campaign is that it has done a good job and promising to progress its policies, but that there is nothing new it needs to offer – except cheaper fruit and vegetables. Whether the electorate considers this a good offer will be revealed on election night.

Why GST off fruit and vegetables? Why not bread and milk? I am guessing it comes from the public health sector, which has been concerned that people do not eat enough fresh fruit and vegetables. It found that higher taxes on alcohol and tobacco contribute to restraining their misuse and use. The sector, assuming this success will as easily apply to other products, has called for increased taxation on what is damaging to health – like sugar – and reduced taxation (or subsidisation) on what should be promoted – like fresh fruit and vegetables. In its enthusiasm it has paid little attention to the practicalities of implementation or the effectiveness of the price alteration in changing behaviour.

There has been considerable criticism of the proposed policy, ranging from the practicalities of implementation – what would be in and out, how food businesses would cope since they would almost have to keep two sets of accounts – to the possibility that most of the reduced tax would be absorbed by food outlets and little would be passed on in lower prices to purchasers. It is also argued that any reduction is greater benefit to high-income households than to low-income ones. Little attention has been given to any health benefits; there is not a lot of evidence one way or the other.

One of the main attractions of GST is its uniformity, which makes its implementation simple. (I applaud the Labour Government’s various measures to broaden coverage.) Varying the rates on one product group tempts a free-for-all on everything else. Casual advocacy can think of reasons for more or less consumption tax on almost every known product.

I support targeted excise duties on specific products which can be shown to be administratively practical and beneficial for the purpose. Currently that includes alcohol and tobacco for health, fuel duties for funding the transport system and carbon taxes for aligning individual decisions to the real cost of the emissions they generate (but I do think our current emissions trading scheme is very muddled). However, most popular proposals do not bother with such careful analysis. That leads to a higgledy-piggledy mess like we had in the Muldoon era.

Labour’s response seems to be that whatever the experts say, GST off fruit and vegetables is a popular policy. Apparently, the party’s focus groups favoured it about two to one.

I do not know exactly how the proposition was posed to the groups. Did they ask ‘do you support the removal of GST from fruit and vegetables?’ or did they ask ‘do you support the removal of GST from fruit and vegetables even if it is difficult to implement and much of the benefit of the lower taxes may go to retailers rather than purchasers?’

You may think the second question is loaded but so is the first, offering a policy change as though it is free. Next time you see the response to a focus group or survey question, ask yourself whether putting the same sentiment another way would have resulted in the same answer.

I would have preferred that the focus group had been asked ‘do you support the removal of GST from fruit and vegetables or would you rather have the cost of the reduction used to give you an extra $140 a year?’ I am guessing that the two-to-one support for the GST reduction would near reverse.

The cost of the lower GST is about $500m a year. The same $500m could be used to cut the bottom income tax rate from 10.5 percent to 9.5 percent so that every taxpayer who earns at least $14,000p.a. would be $140p.a. in the hand better off. It would be proportionally more beneficial to the poor than to those on higher incomes. You might be able think of options to spread the tax reduction more fairly, but this is my guess about the option voters would best respond to.

Putting the policy choice this way, many in the focus groups might be derisive of the size of the giveaway – less than $3 a week for most adults and nothing for children. (National’s lowest offer is even smaller.) But that is true for the GST reduction. Do we really want that sort of transparency of policy in an election year?

My concern is wider. We usually discuss tax issues by looking at only one side of the story. I can understand people being opposed to a hike in income tax but it would be more popular if it was presented being used to increase spending on, say, health care, thereby reducing waiting lists and the need to go private. (In fairness, the Greens say they want to use the proceeds from their wealth tax to make dentistry free. I support both policies although there are some technical difficulties with free dentistry – did they consult anyone with expertise in dental economics before formulating their policy? But universal free dentistry is not at the top of my priority list for using any additional revenue.)

Regrettably, public discussion focuses on tax changes but not what their effect on public spending would be. That’s fine if one is opposed to all public spending, but it is hard to find anyone who is quite so rigorous. Even ACT MPs are happy to accept their salaries and expenses – once upon a time parliamentarians did not get much of either.

Economics is about tradeoffs. Sadly, these tradeoffs often get ignored in public discussion despite them being integral to public and private life. Even going without fresh fruit and vegetables trades off against your health.

PS. National’s tax package has been well covered by others, and hardly needs comment here. However, a broader point is that proposing new taxes to partially fund the reductions, breaks the consensus of ‘thou shall not introduce new taxes’, paving the way for a less hysterical discussion on capital gains and wealth taxes.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.