GST hike, tax cuts tipped - Key

John Key. File photo / Mark Mitchell

A rise in GST to 15 per cent has been strongly signalled in the Prime Minister's statement to Parliament but it would be offset by across-the-board cuts in personal tax.

Benefits, superannuation and working for families would increase as well to assist people on low incomes who would be hardest hit by a rise in GST (goods and services tax), John Key said in the statement which has just been tabled.

More work is being done and final decisions would be announced in the Budget on May 20.

GST is at present 12.5 per cent. It was introduced in 1986, at 10 per cent, and was raised in 1989 to 12.5 per cent.

On other issues, Mr Key also foreshadowed:

* a crackdown on welfare reform that will make it harder to get a sickness or invalids benefit, and make it harder to stay on the unemployment or domestic purposes benefit.

* a crackdown on wealthy people rearranging their affairs to qualify for working for families.

* tougher requirements on the tertiary training sector to provide relevant courses.

* mining in national parks to go ahead with the establishment of a conservation fund from some of the proceeds as a sweetener.

* a new drive to promote oil and gas exploration.

Mr Key's statement says nothing about whether the Government plans to align the top tax rates on personal income tax (38c), trusts (33c) and company tax (30c).

But he said cutting personal taxes with a modest rise in GST would give people more choice about what to do with their extra take home pay.

It would encourage savings and investment rather than consumption.

"GST is also a very difficult tax to avoid, no matter how people structure their financial affairs. As David Lange once observed, even drug dealers pay GST."

Mr Key said the Government would not embark on a policy of increasing GST unless it benefited the economy in the longer "and unless it saw the vast bulk of New Zealanders better off."

As expected, changes to the way investment property is taxed will be announced in the Budget but exactly how is not clear.

The tax working group (TWG) suggested removing the depreciation tax-break on buildings, which would boost revenue immediately by $1.3 billion and Mr Key's statement is silent on that.

But he said the Government has ruled out a land tax, a comprehensive capital gains tax, and a risk free return method (RFRM) for taxing residential investment properties - all options suggested by the TWG in its report last month.

Explaining why the Government has rejected a land tax, he said it was effectively a lump-sum tax on people who own land at the time the tax is introduced, it would fall only on people who held their wealth in one particular form and it would create cashflow problems for many land owners, especially those with lower incomes.

He said a response to the capital markets taskforce report would be out in a week or so.

Mr Key said the Government was not planning any major changes to the working for families scheme but was looking at the rules that allowed wealthy people to claim it.

"That is contrary to the intent of the policy, which is aimed at supporting genuine low to middle income earners."

On social service, Mr Key confirmed that legislation would be introduced to reform the benefit system as promised before the last election.

"For most people, a benefit should only provide temporary support until they can return to work."

Reforms would include changes to the criteria and testing for a sickness benefit to ensure it went only to people genuinely too sick to work.

"They will include strict re-application rules to prevent people languishing on an unemployment benefit for more than a short period between jobs.

Work and training expectations of people receiving the domestic purposes benefit would increase.

Mr Key also indicated that his new Minister of Tertiary Education, Steven Joyce, would start cracking the whip on the quality and relevance of career-oriented courses.

"We are concerned that as a consequence of previous ad-hoc policy changes, there are a large number of tertiary programmes, particularly below degree level, that have drop-out rates as high as 50 per cent, and that some of these programmes fail to properly equip students for the jobs they seek."

Mr Key said he expected the Government would approve some mining on conservation land but that it would have to meet "strict environmental tests."

"Mining on Crown land has the potential to increase economic growth and create jobs," he said.

The Government would also establish a new conservation fund for special conservation projects around the country.

On the business and innovation front, Mr Key signalled changes to allow investment in Crown Research Institutes and changes to aquaculture regulations to give the industry a boost.