Bernard Hickey: GST rise a bad move

Many New Zealanders overseas already complain about the high costs of living when thinking of returning. Photo / Paul Estcourt

The government is considering lifting the GST rate to 15 per cent from 12.5 per cent from the end of October.

Opinion polls show most of the public are opposed, but Prime Minister John Key seems determined to push ahead. I think the public is right, possibly for the wrong reasons.

I'd be surprised if the Government didn't ensure middle to low-income earners weren't well compensated. That is part of the problem.

Here are 10 reasons I think a GST hike would be a bad idea for the economy, regardless of the offsetting income tax cuts likely to be announced in the May 20 budget.

1. The amount raised after compensation for low to middle-income taxpayers is unlikely to be enough to close the gap much between the top income tax rate of 38c and the family trust rate of 33c, which was one of the aims of the tax system transformation Key was arguing for.

The Tax Working Group estimated there would be just $200 million left for cuts to the 38c rate after compensation. Key has suggested since then that the Government's modelling shows there could be more to play.

He also could pull a rabbit out of the hat in the form of tightening loopholes for property investors, but the Tax Working Group suggested there could be less than $1 billion from those measures.

Deputy Prime Minister Bill English has also signalled the Government may not be able to squeeze the top income tax rate and the trust rate together. This lack of equalisation defeats the purpose of the reforms.

2. It creates an inflationary risk, particularly if retailers choose to throw in other cost increases, such as credit card surcharges, to confuse customers.

Many will choose to change their "psychological" pricing by more than the GST hike (from say $1.99 to $2.99) and blame it on the Government.

3. It creates a risk for the overseas tourism industry, given a 15 per cent GST rate here would be well above the 10 per cent in Australia, our major competitor and one that provides most of our tourists. New Zealand doesn't have a great scheme for tourists to claim back GST.

4. A hike opens a big gap with Australia and risks encouraging workers to leave New Zealand for lower living costs there.

Many New Zealanders who live overseas already complain about the high costs of living when thinking of returning. This just makes it harder to tempt them home.

5. Retailers face significant costs from repricing goods, and changing IT systems, which will either reduce profits and dividends or be passed on to consumers in the form of higher costs.

Small employers in the services sector will be hardest hit, given they can't necessarily recover the increase back up the GST chain.

6. A big political risk is opening up as Labour and others oppose the move. Key's comments that any "half-decent" manager of the economy wouldn't need to hike GST makes his job even more difficult.

7. It creates the risk of online leakage as New Zealanders buy anything they can from sites offshore without the GST, including books, CDs, clothes and travel. Postage and packaging are getting cheaper and it's amazing how much can be bought for less than the $400 limit currently in place.

8. It doesn't fix the ruinously high marginal tax traps embedded in Working for Families or remove the dead weight of an inefficient tax system producing legions of bureaucrats, tax lawyers and accountants.

9. A higher GST increases the political pressure at some stage for exemptions, which would make the tax less efficient.

10. A higher GST rate increases the risk of the growth of an underground cash economy in which services, in particular, are not reported, all of which increases the risks of crime and money laundering.