Kiwiblog

Labour are campaigning against the GST increase (yet being careful not to promise to reverse it), saying it will hit households hard. Well Stats NZ have calculated that the impact of GST going to 15% will be a one off increase of 2.0% in the CPI.

Now let’s see how that compares to the CPI increases under the last two Government’s.

In December 1990 the CPI was 731 and in December 1999 it hit 837. That was an increase of 14.5% over nine years – an average of 1.5% a year,

From December 1999 to December 2008 the CPI went from 837 to 1072 – an increase of 28.1%, and an average of 2.8% a year.

The difference between inflation under Labour and under National is around 14% – or seven times greater than the one off 2% increase caused by a GST increase.

Now if one takes just food prices, it is even worse. The food price index increased only 9.9% under nine years of National. Under nine years of Labour it shot up a massive 37.1%.

So if you hear a Labour MP talking about the impact increased prices will have on families, remind them of the 37% increase in food prices and the 28% increase in all prices that occurred under Labour.

Labour is making a habit of leaving office with economic problems for the new Government.

Stats NZ reveals that inflation for the year to September 2008 was 5.1% – its highest level since June 1990. Major contributors:

• Household Energy 7.5%
• Hospital Services 7.1%
• Private Transport 21.5%
• primary and secondary eduction 5.7%

The monthly food price index also came out today – and it is also at an 18 year high of 10.8%. Major contributors:

• Vegetables 22.3%
• Mutton/Lamb 17.3%
• Bread 16.5%
• Pasta 18.2%
• Cheese 42.3%

All fairly common items, to say the least.

Paul Walker takes a long hard look at the causes of global food inflation. He looks at the three theories:

1. Newspapers have cited an internal World Bank document as having found that 75% of the price increase was due to biofuels
2. Several governments and commentators see speculation as a major driving force.
3. Widely held view has it that rapidly growing food demand in the emerging economies is pushing up global food prices.

So how does theory 2 hold up:

Yet, there is no hard evidence that “speculation” has added much to the price increase on spot markets. After all, it is only when “speculators” actually buy produce on the spot market that they can drive up the price, and this would have to be reflected in growing stock levels – but stocks appear to have declined throughout the period of rising prices

So how about theory 3 – blame China and India:

Food demand in China, India, and other emerging economies is rising as their incomes grow. However, domestic food production in most of these countries is growing in parallel. China, for example, has been a consistent and growing net exporter of cereals (including rice). The Agricultural Outlook expects China’s net cereals exports to decline only very gradually in the coming decade. For India, the picture is similar, though there was significant variability in its net trade position in the past. In short, growing food demand in the major emerging countries cannot be held responsible for the rise in world market prices for cereals.

So that leaves theory 1 – biofuels:

The use of agricultural products, in particular maize, wheat, and vegetable oil, as feedstock for biofuel production has expanded dramatically in recent years. Between 2005 and 2007, i.e. in the period when food prices began to explode, nearly 60% of the growth in global consumption of cereals and vegetable oils was due to biofuels. Global output of cereals and vegetable oil did not decline during that period, but just grew slower than the rapid expansion of use.

In a situation of depleted stocks and very low demand and supply elasticities, this gap between use and output growth has pushed prices up very strongly.

And the conclusion:

Thus we find that there cannot be much in the way of doubt that biofuels are a significant factor in the rise of worldwide food prices. Add to this the fact that other research suggests that biofuel support policies are disappointingly ineffective on environmental grounds, then it should be clear that governments need to reconsider their support for biofuels. But many governments, including New Zealand’s, seem to want to push ahead with such policies despite the kind of evidence Tangermann brings to bear on the issue.

Stefan Tangermann, quoted by Walker, is Director of Trade and Agriculture for the OECD.

Stats NZ released the May 2008 monthly food price index results today, and it confirms what everyone knows. I’ve graphed below food inflation since the last election. It has been trending up almost constantly for the last three years.

And the third and final part is just as good. Read this third post by Sue Kedgley. I like this part especially:

The President of one of the main Italian NGO’s, for example, Antonio Duovati, from the Committee for Food Sovereignty, explained that New Zealand is seen, thanks to our flag waving for free trade liberalization policies, as ‘an enemy of the third world’ and a slave of America and Europe.

Oh wow we get to be both an enemy of the third world, and a slave of America and Europe. Do you get badges to go with that?

You know what is really funny. All these people decrying the effort to alleviate the food crisis – I bet you very very few are from countries starving. Sue is quoting oh gosh an Italian NGO. I bet you they are starving. Now fo course you don’t have to be starving to have a view on food policies, but I reckon the views of Sue and her Italian mates that NZ is an enemy of the third world, is not shared by those in the actual third world.

Anyway to make up for all the irresistible Greens bashing, I should point out that Frog has done a very good response to my post on trying to get an overhang in Parliament, and is what I call a partial retreat. I still think they are on somewhat dangerous grounds talking about party votes for the Maori Party being wasted, because they are only wasted if there is overhang. One you get past an overhang situation, a party vote for one Party is just as valuable as a party vote for any other party which makes the threshold. But nice to have a thoughtful response.

Oh it gets even better. The first blog post from Sue Kedgley sees her blaming free trade for the third world food crisis (and contradicting herself as she complains about subsidies). Now it gets even worse – Bill Gates and GE rear their head. Read Sue’s second blog post:

It was to be expected, but still a shock, to find Bill Gates and the Rockefeller foundation at the conference (they weren’t excluded like the NGOs) launching a new bold sounding “Alliance for a Green Revolution in Africa.

Good God. They let Bill Gates in. How dare they. I mean his charitable foundation only spends US$800 million a year on global health initiatives – almost more than the UN’s WHO. And with the Rockefeller Foundation have only invested US$150 million to enhance agricultural science and small-farm productivity in Africa.

The cads. We should shoot them at dawn. How dare they be allowed into a conference to discuss helping solve the food crisis.

The Rockefeller foundation are also evil doers. All they have done is develop the vaccine for yellow fever, funded social sciences and funded agricultural development to expand food supplies around the world. The heartless bastards. They have been so sucessful at health and food that the UN WHO was set up on their model, and they are actually credited with funding the Green Revolution in the 1940s to 1960s which increased agricultural production around the planet.

So maybe you know they are not totally bad people to have there.

But what were these bastards doing:

In partnership with various UN agencies, aimed at ‘lifting millions out of poverty and hunger by increasing the  productivity and profitability of small scale farms in Africa.

My goodness, the very thing Sue was complaining about in her previous post – that local farming was unsustainable.

a bold journalist asked directly whether the seeds would be genetically engineered.  They then admitted that some would be, such as a new strain of Nevica rice which ‘takes the flavour of Asia and the robustness of rice in West Africa to produce a high yielding rice.

Oh my God. How sick are those people. They want to produce a high yielding rice which is more robust. We can have no part of that. Far better people starve than we use technology.

I was not allowed to speak at the conference, or attend any bilateral meetings or negotiating sessions

And I never thought I would be saying this, but let us hear three big cheers for Jim Anderton. He may have saved NZ global embarrassment.

I encourage everyone to go read the blog post by Sue Kedgley on the World Food Conference in Rome. It is a stunning example of madness and extremism.

They argued that the main cause of the crisis was that food production in much of the developing world has been decimated by three decades of globalization and free trade liberalization policies. Previously self sufficient countries had been unable to compete with heavily subsidized, cheap European and American food and so small self sufficient agricultural sectors collapsed in country after country, leaving developing countries dependent on imports and food aid.

Now read this carefully. In the first sentence she blames the food crisis on free trade liberalization policies (never mind even the very lefty UN is blaming it on biofuels and saying free trade is the solution), and then in the second sentence she complains about heavily subsidized cheap food undermining local agricultural sectors.

Earth to Sue – come in Sue. That is protectionism – the very thing you are in favour of. People who support free trade like me want subsidies and tariffs to be abolished. That way those countries which can most efficiently produce food, get to do so. I suspect Africa would boom in terms of food production if indeed one can get Europe and the US to remove their subsidies and tariffs.

It is scary that a long serving MP can not know the difference between free trade and protectionism. I think this shows that the anti globalisation fanatics have just started to use it as a slogan. Anything they are against they label as free trade and globalisation.

I blogged yesterday how the UN has called for a lifting of food tariffs and biofuel subsidies to help alleviate the starvation in the third world from the high cost of food. I also blogged how this seems to be contrary to NZ First and Greens policies.

Now Trans-Tasman has just come out and they note the following:

The global food crisis should produce a unified national response to expand agricultural output. But, curiously, NZ is represented at the FAO Summit by an 11-man delegation led by Agriculture Minister Jim Anderton (who represents the smallest party in Parliament) and the Greens’ Sue Kedgely (paying her own costs), the party which in its Auckland conference at the weekend was calling for tougher conditions for NZ’s dairying industry.

The Greens have not only demanded NZ’s agricultural producers pay immediately for their greenhouse gas emissions as well as a punitive water levy (which would harm irrigators), but have insisted on bio-fuels being included in NZ’s transport fuels, and also have opposed genetic modification. This is a programme of “economic euthanasia” for the dairy industry. It is not surprising the Greens are finding it hard to lift above the modest levels they are currently polling.

I’m not sure whether the euthanasia is referring to the effects on the diary industry or the effects on those in the third world who need cheaper food, not more expensive food.

Some common sense and plain speaking from UN Secretary-General Ban Ki-moon who has called for an end to food tariffs and to subsidies for biofuels as the key way to bring down the price of food and stop millions from starvation.

Sadly this advice will be ignored by the Greens and NZ First who both support protectionist policies such as tariffs.

Also interesting debate on how much biofuels are to blame:

Hunger campaigners single out biofuels – often made by converting food crops into fuel – as a prime culprit for the crisis.

Biofuel supporters say the effect on food prices of diverting crops into ethanol production is small.

US Agriculture Secretary Ed Shafer said before the summit began that biofuels accounted for about 3 per cent of the total food price rise.

But the Oxfam aid organisation says the real effect is about 30 per cent.

It is sort of ironic that us free traders are on the side of the UN and Oxfam while the Greens seem to be in the same camp as the US – supporting tariffs and biofuels.

Frog Blog notes that Afghan farmers are converting their farms from poppy growing to wheat due to the low prices for heroin and high prices for food.

Good to see Frog so approving of a market solution to a problem, rather than a regulatory solution.

Don Brash chaired the committee that established GST in the 1980s, so is pretty much an expert in this area. He labels any move to remove GST on food as a “seriously stupid thing to do”.

… we gave serious consideration to exempting food from GST at that time, and decided for three reasons not to do so. Those reasons are still absolutely valid today.

First, it is clear that every exemption from GST adds greatly to the compliance costs imposed on businesses collecting the tax. …

Secondly, abolishing GST on food would be a very inefficient way of helping those low-income families who most need help with their food bills in terms of the amount of government revenue foregone.

While it is certainly true that low-income families spend a disproportionately large part of their income on food, most of the money spent on food across the whole community, and therefore most of the revenue which would be lost if GST on food were abolished, is paid by middle and high-income families. If the Government sees a need to help those families most adversely affected by rising food bills, then the best way of doing that is by reducing the income tax levied on low-income families, or adjusting the Working for Families policy to help those on low incomes.

Thirdly, if GST is abolished on food, why not on other “essentials”, like children’s clothing, doctor’s bills, books, and the like? In no time at all, political pressures would build up to exempt other goods and services.

Compliance costs would go through the roof. Revenue from GST would fall, with the result that the GST rate of tax would need to rise on the goods and services still subject to the tax (as has happened in most European countries). Or income tax rates would need to be higher than would otherwise be necessary.

New Zealand has one of the best GST systems in the world. Don’t succumb to short-term pressures to bastardise it.

All excellent arguments. Luckily Labour are not showing signs of panic and are not looking likely to give in to the calls to do so.

The HoS editorial is on food prices and tax cuts:

The voters of middle New Zealand, who have long waited for relief, will not stand for being denied it now. Yet answering the well-reasoned call of the child poverty lobbyists would demand every bit of the revenue that will be forgone in giving tax cuts. A party founded on the principles of social justice has no electoral alternative than to turn a blind eye and a deaf ear to those identified by independent research as beneath the poverty line.

In the end, whatever tax cuts Cullen announces on May 22 may be too late to save Labour’s bacon since they would not come into force until after the election – although that increases the likelihood of a vote-buying instant-relief gesture on Budget night.

But whatever administration is installed in the Beehive by Christmas will face an enormous challenge: how to simultaneously satisfy the needs of the struggling middle New Zealanders who voted them in and look after the hundreds of thousands at the very bottom of the economic ladder.

I wonder if it has dawned on the Government what a monumental mistake it was to cancel the tax cuts announced in 2005.

Mike Moore writes in the Herald on the food crisis:

What has been the most successful 50 years of alleviating poverty in human history is threatened. What’s happening, what’s new?

Nothing is more important than food. In 12 months, corn and rice prices have doubled, wheat price tripled, soy beans up by 87 per cent, and global food reserves are at their lowest levels ever.

They are staggering increases for just one year.

The rush to biofuels is also impacting cruelly in agriculture, where massive subsidies and high oil prices are encouraging agricultural production away from basic foods. Tragically, rich countries are subsidising bio-fuel production, raising prices. Filling a Range Rover with subsidised ethanol takes as much “grain” as would feed an African family for a year. Rich countries’ fuel substitution programmes often consume more energy to produce than they save. It’s a populist Green response to global warming that does the opposite of what was intended.

People should reflect that Federated Farmers have warned that if the price of carbon reaches $50 then the Emissions Trading Scheme would stop basically all food production in NZ – profits are projected to drop 123%. Now before everyone accuses them of scaremongering – what would have been your reaction if say ten years ago someone predicted biofuels would help push 100 million people into poverty and contribute to a doubling of world food prices?

But how can you encourage poor countries to grow food when subsidies from rich countries can drop similar products into their local market, sometimes at a third of local prices?

The medium- and long-term solution is the Doha Development Trade round, which is now at a critical stage. Unless the players at the WTO can get closer in the next few weeks, the deal will not be cut this year.

I could not agree more. Countries at the WTO who do not stop subsidising their food, are a big part of the problem.

If the rich countries cannot find the political courage to front their subsidised farmers when food prices are so high and will remain high, when can they summon up the willpower to save themselves? Subsidies in rich countries are a direct cash transfer from the poorest consumers to the richest of producers.

Indeed. Yet strangely it is so called left wing politicians like Obama and (H) Clinton who rail against free trade,

There could be few greater acts of economic vandalism than removing GST on food. It is the wrong answer to the problem of increasing food prices.

It is no surprise, as the Herald reports, that people outside supermarkets will sign a petition calling for GST to be removed from food. And if you stood outside medical centres with a petition for no GST on doctor’s fees, people would sign that also.

So why should one not remove GST on food. Here’s a few:

1. It would impose significant compliance costs on retailers. Instead of just dividing their sales by nine, they would have to be able to track every single item sold, and whether or not that is food. If you go to the corner dairy and buy a pie and a newspaper then the pie has no GST on it and the newspaper does. So the poor corner diary would be forced out of business as they can’t afford a supermarket type electronic scanning system where every item sold is tracked.
2. It would start a trend of removing GST on more and more items, and the future political scene will be a series of debates about what GST should be one. If one removes GST on food, then some would argue GST should be removed on gym memberships as a public health initiative. Then GST should be removed books as a literacy initiative. Seriously – there would be almost no end.
3. As Dr Cullen says this is a one-off change that can never be repeated, and any benefits from it could well be swallowed up by further changes in international food prices.
4. It would mean direct taxes would be $2.4 billion higher than they need to be, to compensate for the GST loss.

The Weekend Herald finds supermarket food prices for an “average” trolley have gone up 29% in the last year.

Now this is more than the official food price index, which is weighted to what people actually buy, but both the official and the unofficial surveys show that food inflation is strong and growing.

The Dom Post shows how much more effective a picture can be to highlight a problem.