Planned GST, property and tax moves divide opinion

John Key. File photo / Mark Mitchell

The Government's economic blueprint for the future, revealed by Prime Minister John Key this afternoon, has divided opinion in business and political circles.

In his statement to Parliament, Mr Key strongly signalled a rise in GST to 15 per cent (from 12.5 per cent) along with across-the-board cuts in personal tax, to be formally announced in the May 20 Budget.

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).

The proposed moves were among the most significant changes outlined by Mr Key.

Labour leader Phil Goff described the speech as a let-down after all the hype the Government had put around it.

"This isn't Big Tuesday at all, it's just a tip toe Tuesday. It doesn't have any step change stuff there that you could look at and say 'that's bold.' There's nothing bold in this - it's a cross between a rehash telling us what we already know and a very cautious move on GST without spelling out how people would be compensated," Mr Goff said.

"If you're looking at fairness, cutting the top tax rate and putting GST up isn't going to do anything for people with children who are on average incomes. They're going to be paying a lot more in GST without getting much back in tax."

Mr Key also said 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.

Property Investment Federation president Martin Evans told nzherald.co.nz the goal posts have now changed as a result of Mr Key's comments.

"Investors will be adversely affected by any scrapping of depreciation write-offs," says Mr Evans.

Business NZ chief executive Phil O'Reilly welcomed proposed changes in tax and innovation policy as strategic elements that will bring significant improvements in many parts of the economy.

"Indications of lower income tax and an increase in GST, with benefit adjustments to ease the transition, will be helpful for business growth and competitiveness and fairer to all," says Mr O'Reilly.

Neil Russ, tax partner at legal firm Buddle Finlay admitted being "a bit surprised" by the Mr Key's comments. A GST increase to 15 per cent would send the wrong message to people wanting to come to New Zealand from overseas, he said.

"All of a sudden GST [would be] 5 per cent higher than in Australia," he said. "And it [would be] more comprehensive."

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.