Lift in GST will trigger inflation

Reserve Bank Governor Dr Alan Bollard believes that any increase in GST will have a direct impact of prices of other commodities.

“I agree that increase in GST to 15% will add 2% to inflation and living costs,” he told Parliament’s Finance and Expenditure committee on March 18.

His belief was also enshrined in the Monetary Policy Statement released on that day.

Prime Minister John Key and Finance Minister Bill English had spoken of the inevitability of increasing GST but said the move would be more than offset by across-the-board cuts in income tax rates.

Revenue Minister Peter Dunne acknowledged the need for tax reform and the framework set out by the Don Brash led Tax Working Group.

He expressed his preference for lower personal taxes to encourage productivity, investment and savings.

“While any increase in the rate of GST would be accompanied by compensation for those impacted (through tax cuts and/or benefit adjustments) there would be no exemptions for specific items, such as food.

It is now apparent that the Government would change tax rules governing the property sector to make the rules fairer and more equitable for all taxpayers.

While the GST issue has been politicised, some economists believe that consumption would fall, which in itself is not a bad thing.

But fall in consumption would impact the retail market, triggering a multiplier effect that devastated many economies in the 1930, contributing to the ‘Great Depression.’

Labour Leader Phil Goff went on a nationwide tour on his Axe the Tax bus campaigning against the rise in GST.

The 13-day tour, joined by local MPs, covered most parts of New Zealand (beginning at Auckland and ending at Dunedin) from February 28 to March 12.

Mr Goff drew wide media attention at each of the centres. He told radio hosts that most New Zealanders have had their income already stretched and that they cannot afford an increase in GST.

“The bulk of payments made by them each day for essentials are subject to GST.  John Key has gone back on his word. No one voted for an increase to GST or for paying more for milk, bread, clothing, power and rates,” he said.

Mr Goff said the proposed income tax changes would not have reasonable impact on average income earners.

“Highest earners will win, while middle and low income earners will lose. GST increase will hurt families that are already struggling to make ends meet,” he said.

Reserve Bank forecast that inflation is likely to outstrip wage growth, with the Labour Cost Index remaining steady at the current rate of inflation.

“The economy will come under additional inflationary pressure, should there be an increase in GST,” it said.