Media Release - 17 November 2010
Ernst & Young New Zealand
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17 November 2010
GST - How high can it go?
As consumers struggle with the GST increase and other price rises the Savings Working Group has suggested raising the rate even higher.
20% is the magic number which, matched by corresponding income tax rate reductions and lower Government spending, is meant to encourage savings, but at what cost?
“There is a growing sense our GST rate has reached and potentially exceeded the tolerance levels of such a comprehensive GST system,” says Iain Blakeley, tax partner at Ernst & Young. “How much of an impact would a 20% GST rate have on consumer spending, on businesses and on jobs?”
At 15% across the board New Zealand's GST rate is high by OECD and international standards in pure terms and, without providing exceptions for certain essential everyday goods and services as some other countries do, it's difficult to see how much scope there is to go any higher without pushing more New Zealanders over the poverty line.
Low income households won't benefit much, if at all, from income tax decreases. In reality personal tax cuts benefit high earners most. Those on low incomes will be forced to reduce spending on essentials to have any hope of saving.
Add higher GST to the mix and lower income households will be less able to afford the basic everyday items.
Exemptions for fresh fruit and vegetables may not be the answer either because savings won't necessarily get passed directly to consumers.
“Using a wider lens to see GST from an international perspective, there is no disputing indirect taxes such as GST or VAT are great ways for Governments to raise money and influence consumer behaviour,” says Blakeley. “Even the USA is considering the merits of a value added tax like GST.”
A recent report by Ernst & Young and Tax Policy Advisers LLC prepared for the National Retail Federation however highlights the fiscal risks of raising these sorts of taxes.
To achieve a 2 per cent reduction in the deficit a GST rate of 10 per cent (with exemptions) would be required in the US. The flow on impact is predicted to be a 5 per cent reduction in retail spending in the first year with a fall in GDP for several years.
In addition a loss of 850,000 jobs is anticipated for the first year even through the reduction in deficits and debt would ultimately be positive for the economy.
It is also anticipated that most Americans aged over 21 years at the time the tax was introduced would be worse off with falling real incomes and employment prospects and that any benefits would go to future generations.
The potential economic benefits for future generations are therefore likely to be outweighed by the political fallout from the economic burden placed on the current generation.
Back on the home front, it’s very likely that increasing NZ’s GST rate further will create political pressure on a purist GST system as the strain is felt by household budgets.
There are clear economic benefits in shifting away from consumer spending to a culture of savings but a strategy which significantly reduces everyday retail spending can cost jobs in the short term. The burden and the resulting political fallout for the current generation of middle and lower income earners are potentially high.
A higher GST rate means it will be likely New Zealand will need to fall into line with the rest of the world and adopt multiple GST rates. Exceptions mean higher administration and compliance costs but we will have to start working out how this can be done if we want to go down the route suggested by the Savings Working Group.
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