It now seems highly likely that the Government will raise GST in the Budget.
We don't yet know how changes to Working for Families, income tax cuts or other measures will offset the increase.
This will only become clear on May 20.
GST is likely to rise from 12.5 per cent to 15 per cent. That does not mean the cost of living will go up by 2.5 per cent however.
Firstly, the 2.5 per cent increase is on goods already priced at 12.5 per cent above their GST-exclusive price.
Secondly, some goods do not have GST charged directly on them.
For example, groceries worth $100 now cost $112.50 including GST.
GST at 15 per cent makes that $115.00 - a 2.2 per cent increase.
Statistics New Zealand estimates the net effect on average of a 2.5 per cent increase in GST will be about 2 per cent on the consumer price index (CPI).
The exact effect will depend on whether businesses feel they can maintain profits if they pass through the full increase, or whether they take the opportunity to increase prices further.
A recent survey suggested that nearly half the firms sampled would increase prices by more to claw back margins eroded over the past two years.
Bank economists forecast total CPI to rise to 4.8 or 5 per cent in the last quarter of the year if GST goes up in October.
Even the estimated increase of 2 per cent is only an average.
We know that people on low incomes face a higher rate of GST increase on their incomes than people on high incomes because they can save less, spend more on necessities which are mostly liable to GST and spend less on items that don't attract GST.
It can be argued that low-income workers require more than 2 per cent compensation.
Research carried out for the Tax Working Group shows the proportion of income and expenditure paid out in GST by each income group.
For the 10 per cent of lowest income households, GST accounts for as much as 14 per cent of their income.
How can it be more than the 12.5 per cent GST rate? Because many low-income households are spending more than their income - getting further into debt, living on gifts from relatives, or using up their savings.
For the highest 10 per cent of households, only 4 per cent of their total income or 6 per cent of their disposable income goes on GST.
The percentage of people's total expenditure paid in GST is still higher for lower income households, and even if it was perfectly level across the income range it wouldn't reflect ability to pay.
It is much more painful for a low-income household to go without $12.50 in every $100 than it is for a high income household.
It is, of course, true that people on higher incomes pay more GST in dollar terms - but that is because they have more to spend. The effect of GST on their quality of life is significantly less.
Some argue that everyone in the end spends all they earn in their lifetime, so everyone pays the same proportion in GST. That assumes wealthy people eventually consume all their income, which of course they don't.
In any case, this argument is little comfort to people while they are on low incomes.
The Prime Minister has said he expects "the vast bulk of New Zealanders will be better off under a tax switch that comprises an increase in GST to 15 per cent, together with a reduction in personal income taxes across the board and upfront increases in benefits, superannuation, and Working for Families".
In reality, low-income workers will probably be only just compensated, while those on high incomes will receive significant net tax cuts unless they are affected by changes in taxes affecting rental or commercial property (which may affect some middle income people too).
The effect of a GST rise on wages has barely been mentioned.
The link between the CPI and wage increases is arguably stronger now than when GST was introduced, and the increase in the index due to GST is likely to coincide with deepening skill shortages.
Some employers may argue that the tax changes will compensate wages for the GST increase so they don't have to.
Some unions may argue that income tax is not a wages issue, and some collective agreements have a built-in CPI adjustment, so workers covered by those agreements will get compensation for GST in their wages at some point.
But workers are bound to argue that if wages do not match CPI increases, then real wages are decreasing.
Source: Tax Working Group - "Changing the rate of GST: fiscal, efficiency and equity considerations".
* Bill Rosenberg is the Council of Trade Unions' economist and policy director.
<i>Bill Rosenberg</i>: Low-income workers likely to be the hardest hit by tax changes
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