Don't be fooled by GST hike sales boom, says bank

Retailers have been warned not to take a pre-GST tax hike sales boom as a genuine trend. Photo / Hawkes Bay Today

Retailers should not interpret a jump in sales ahead of a possible GST price hike as a genuine trend, economists say.

A report by ASB economists says past experience indicated retailers who increased inventory levels in response to GST induced increases in sales ended up with excess stock when sales dropped sharply post increase.

The Government said in February it was considering increasing GST from 12.5 per cent to 15 per cent as part of a revamp of tax policy, to be announced in next month's budget.

The report says households are likely to bring forward purchases of big-ticket items ahead of any GST increase, but that the overall effect on retail sales was likely to be small.

This made sense given big ticket items were generally planned and any GST increase would have a larger effect on the price of more expensive items.

Ideally retailers should stock up to pre-empt an increase, but allow supply to dwindle given sales will decline in the subsequent period, the report says.

While it was hard to define how much extra inventory to buy, past experience suggested a one-off increase of 10 per cent for durable goods would be appropriate.

Levels of non-durable goods may only need to be increased by about one per cent.

Research carried out on the effects of previous increases in GST found that while there was volatility around that period, the overall effect when the quarters were averaged was small.

Retail sales volumes increased by eight per cent in the quarter prior to the introduction of GST in 1986, before falling by 13 per cent in the subsequent quarter.

The effect was larger for durable goods, with sales volumes rising more than 30 per cent on year-ago levels.

This suggested retailers misread the "front-loading of household spending in the lead-up period as genuine growth".

The increase in GST in 1989 from 10 per cent to 12.5 per cent had a smaller effect, partly because there was no income gain from lower income taxes, the report says.

Bearing in mind overall sales volumes will not increase, retailers needed to be careful not to reduce their margins substantially in pre-GST increase sales promotions, the report says.

Volatility in sales volumes brought up some challenges for retailers for the period before and after any GST change.

"These effects are worth bearing in mind when interpreting data on household spending in the period around the GST increase," the report says.

A recent survey by accounting software firm Accomplish found that consumers face price increases beyond the likely 2.5 per cent rise in GST.

The survey found almost half of the 500 firms intended to push up prices by up to 5 per cent or more, to claw back margins eroded during the past two years.

About 19 per cent of 500 firms surveyed said any GST increase would "seriously reduce" sales while 41.2 per cent think it will have a minor impact. Another 38 per cent said there would not be any real impact, and 1.4 per cent thought the change could help increase sales slightly.