Robert MacCulloch: The PM falsely told the AM Show the new Grocery Commissioner can ensure GST cuts are 100% passed on

When questioned by Ryan Ridge about how much of the GST cuts on fruit and vegetables supermarkets would pass on to consumers, Hipkins said he expects it to be 100 percent of the 15 percent coming off fruit and vegetables - despite research from 17 Eurozone countries from 1999 to 2013 showing the pass-through rate on average was 30 percent. Bridge asked if Labour's policy is based on "Chippy trusting the supermarkets", which Hipkins denied. "No... We have a Grocery Commission there to make sure they do. So, a supermarket watchdog who will be able to make sure they do pass through the discounts," the PM said.

The Prime Minister's statement is incorrect.

The new Grocery Commissioner, nor Commerce Commission, do not have any powers to force the supermarkets to pass on 100% of the GST cut. Their powers to control supermarkets can only be enacted when they are embarking on anti-competitive behavior - using market power and monopoly pricing. The Beehive stated "Pierre van Heerden has been appointed as the first Grocery Commissioner, in the latest move to improve competition in the sector".

However, even in perfectly competitive markets, if GST is taken off the price of goods and services, then the price will nearly always never fall by anything like the full cut in GST.

If you want the details about this topic, which is called "tax incidence", here is the Khan Academy summary that school children use for their economics classes:

Tax incidence is the manner in which the tax burden is divided between buyers and sellers. The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.

Maybe the PM should be brought back to the AM show to explain how even in highly competitive industries, a GST cut will not be fully passed on. It's not often you can catch out a PM for being factually incorrect, but on this one it would seem we can do so - he has incorrectly linked monopoly power to whether tax cuts are passed on.

Sources:
https://www.newshub.co.nz/home/politics/2023/09/election-2023-labour-leader-chris-hipkins-concerned-supermarkets-not-treating-consumers-well.html

https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/a/elasticity-and-tax-incidence

https://www.beehive.govt.nz/release/first-grocery-commissioner-appointed-hold-sector-account

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi - where this article was sourced.