Media Release - 1 February 2011

Clare Farrant
Senior Communications Manager
Ernst & Young
+64 274 899 700
clare.farrant@nz.ey.com

GST at centre of election year tax agenda

 
1 February 2011

• GST is at 15% and prices continue to rise
• Support is growing for exempting more goods and services from GST
• The Labour Party has come out in favour of removing GST on fresh fruit and vegetables
• There's support in the Maori Party for no GST on certain basic foods
• New Zealand has the 5th highest GST rate in the OECD for basic food
• NZ’s GST rate for education, healthcare and books is in the top half

“All of this puts GST squarely on the table as a defining issue in this year’s election,” says Iain Blakeley, Ernst & Young’s GST partner. “This is new territory for our GST system and we have to be sure of the benefits before we follow other countries into the world of exceptions, complexity, disputes and court cases.”

“With Governments around the world increasing GST to help plug the tax revenue gap and fund growing deficits and the UK increasing their standard VAT rate to 20% this month, NZ's rate looks pretty reasonable.  Amongst OECD countries with GST, only Australia, Korea, Switzerland, Canada and Japan have a lower standard GST rate than New Zealand. The highest standard rate in the OECD is 25.5%. The OECD average is about 18.3% and New Zealand's rate is below that,” says Blakeley.

“What you have to consider is that most other countries have exemptions for basic food and other essential household items,” says Blakeley.”But it’s too simplistic to see reduced GST on food as some sort of economic panacea. “Yes, price increases for basic food items are felt disproportionately by low income households but if the objective is to make life easier for those households we have to be sure lowering GST will produce the desired results,”

The simplicity of New Zealand's GST system compared to most other countries means we have less compliance and administration costs for every dollar of government revenue it collects. Sure, a 0% rate on fresh fruit and vegetables won't be the end of the world and businesses will be able to cope with it just as they do overseas. But there will be added complexity and therefore added costs. There'll also be work for tax advisors and lawyers as arguments occur in court over whether a particular item of food falls within the special reduced rate.

Add to all this the increased temptation for future governments to see this as a precedent for using differential GST rates on other items. At 15% applied across the board, New Zealand's GST rate is possibly about as high as consumers could bear, but once we get used to the idea of multiple rates for different things there's really no limit to how high it can go on items future governments decide are luxury or undesirable items. Most other countries operate multiple GST rates and exceptionally high rates are applied to luxury and undesirable items like electronic goods, cars, tobacco, alcohol and pollutants.

And what happened to prices when GST was increased on 1 October? Overall the inflationary impact was in line with expectations at about 2.3%. Food, alcohol, tobacco, housing, home contents and utilities experienced price rises of close to 2% (Macquarie Economics Research). Fuel increased by more than the GST increase but other items, including clothing and footwear did not go up at all. Some electronic goods actually fell in price during the period after 1 October.

The impact of GST on prices is complex and not necessarily direct. Other factors come into play. If the goal in reducing GST on fresh fruit and vegetables is to help struggling households and to encourage healthier eating simply reducing GST might not be enough. Unless we're prepared to go back to government price controls we may not be able to be certain the reduction will be passed on to consumers.

Overseas experience in fact suggests the impact of reduced VAT rates on prices, supply, demand and employment is insignificant and really of greatest benefit to producers and service providers rather than consumers.
 
There can be immediate decreases in prices following a VAT or GST rate reduction but this tends to be short lived as prices soon return to the pre rate reduction levels. A report ("Impact of VAT reduction on the consumer price indices" by Rob Pike, Mark Lewis, Daniel Turner, Officer for National Statistics, UK) on the impact of the UK's temporary reduction in VAT in November 2008 found there was an immediate drop in some prices in December 2008 but by February 2009 prices had generally returned to pre November levels or higher.

-ENDS-

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