OPINION: Grocery tax will backfire

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by Patrick Meagher courtesy of Farmers Forum

The Canadian federal government’s recent threats against major grocery chains are being seen by many as a political move aimed at appeasing voters. With voter pressure to lower food prices and Liberal government popularity in the dumpster, the Prime Minister is putting on a show. Don’t expect prices to come down unless the Liberal government objective is empty shelves.

Industry Minister François-Philippe Champagne held meetings with executives from prominent grocery chains like Loblaw, Metro, Empire, Walmart, and Costco, urging them to stabilize prices. The government has threatened sanctions, including taxation, if grocers and producers fail to comply.

Concordia University Economist Moshe Lander argues that imposing a grocers’ tax and telling businesses how to operate would be counterproductive, like asking a cat to bark. It won’t work. He points out that grocers often have to raise prices in response to supplier price increases, and these are not acts of profiteering. A report by the Competition Bureau found that major grocers’ profit margins had only modestly increased in recent years, translating to a minimal impact on consumers’ grocery bills.

Imagine government intervention. A grocer buys a product for $1 and sells it for $2, and suddenly the supplier hikes the price to $2 to cover his rising costs. What’s the grocer supposed to do? Sell it for $2? Nope, they sell it for $3. It’s basic math – and they’ve got shareholders to please, not charity to perform.

The Bank of Canada also stated that retail price spikes are mainly due to global factors like freight and energy costs, along with industrial inputs and labour expenses. A 2022 Statistics Canada study found that food price increases are the result of bottlenecks in the supply chain, linked with the economy-wide shutdown during COVID, but also caused by poor weather in certain agricultural regions, higher fuel and fertilizer prices, the Russia-Ukraine war and higher operating costs for retailers. The Retail Council of Canada pointed out that grocery stores were just passing on higher prices they had to pay to producers. States the Fraser Institute’s Vice-President Jason Clemens: “Notice what was absent in the analysis – grocery store profiting.”

The total profit last year of the big three grocery chains – Loblaw, Sobeys and Metro – was $3.6 billion out of $100 billion in sales. That’s a small profit margin at 3.6 per cent.

Translation: Trudeau is barking up the wrong tree.

Imposing taxes on the low-margin grocery industry could lead to reduced product variety and innovation as certain items may become unprofitable to carry, Lander told the Epoch Times. If grocers cap the grocery store prices, they would then have to cap prices they pay suppliers and that includes farmers. But if input costs increase for farmers, then the capped price the grocer pays would be a disincentive to a farmer to supply that market. If the cap squeezes farm profits, the farmer would be inclined to produce less of a product or none at all and produce something else. The result would be empty grocery store shelves.

The federal government’s threat to big grocers is just “a dog and pony show,” Lander told Epoch Times, adding that the government likely realizes it can do nothing, but to satisfy voters, it is “going to make a show of this.”

To address these concerns, Lander suggests giving more power to the federal Competition Bureau and removing controls on certain food commodities to promote competition. Lack of competition within the industry is a known issue, with barriers like high transportation costs and interprovincial trade restrictions limiting new players from entering the market.

Any serious challenge to food inflation “would focus on reducing costs to producers and encouraging greater supply, both of which would result in lower prices,” Clemens says. “For instance, the Trudeau government could have delayed the increase in the carbon tax, which increases costs throughout the agricultural supply chain.”

He added that the federal government could encourage more entrepreneurship in all areas of farming, including in milk, eggs and chicken.

Said Clemens: “(The federal government) could have reduced personal and/or business income tax rates to encourage entrepreneurship and investment, which are both essential to expanding the production of goods and services. Remember, inflation is always about too many dollars chasing too few goods, which means one solution is to expand the amount of goods and services produced.”

In other words, the federal government contributed to the problem and could help by just getting out of the way and letting the market place operate without as much interference.

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