Last GST hike had little impact, say tax experts

Tax commentators report only a small inflationary 'blip' on shop prices last time GST was increased by 2.5 per cent in 1989. Photo / Bay of Plenty Times.

A GST hike of 2.5 per cent in 1989 had little impact on consumers and the wider economy, and modern-day shoppers may find some reassurance in history.

Bob Buckle, Tax Working Group chair and dean of the faculty of commerce and administration at Victoria University, said the last GST rise - when the rate went from 10 per cent to 12.5 per cent - had little impact on prices and inflation.

He expected the situation to be similar if GST was raised another 2.5 per cent this year.

"I would not expect an increase in GST to have anything but a short term jump in the price level [of goods and services] and a little blip in the inflation rate, and then it will just settle down very quickly again," he said.

"Obviously the price for goods and services will go up a little bit, but not an ongoing inflation rate."

Peter Scott, a senior tax partner at KPMG, said there was a peak in demand for goods - particularly big ticket items such as whiteware and cars - in the lead-up to the 1989 GST increase.

He said businesses had difficulties predicting how much stock to purchase prior to that peak.

"For retailers in particular they really had to manage their stock levels to cope with that increase in demand before the rise in GST and then cope with that slump that happened afterwards as well," Scott said.

New Zealand Retailers Association head John Alberton agreed "there was a degree of forward buying" by consumers in the lead-up to the 1989 GST rise.

"If there were any big purchases that were being contemplated they probably came forward to the lower GST period," he said.

Alberton said that after the 1989 GST rise there was "an artificial peak and an artificial trough" but "on balance it came out normal".

Retailers would prepare for a rush on items if GST was again raised this year, Alberton said.

But he added it was too early to tell if retailers would be planning any major sales in the lead-up.

Scott said the slump that followed the 1989 GST hike did not last long.

"I suppose the difference we have now is the [New Zealand] economy and global economy is going to make a difference on people's spending habits."

Scott said if GST went up by 2.5 per cent, prices will not necessarily rise by the same amount.

"Obviously there still is competitive pressures, there is a trade-off whether businesses will effectively bare some of that cost and build it into their margins, or whether they actually are going to have to pass it onto consumers."

Auckland City Councillor Paul Goldsmith, who wrote a 2008 book on the history of taxation in New Zealand, said there was a "general acceptance" in the 1980s that tax policy needed to change.

"There were complaints but [tax changes] were done quickly and were well organised by Don Brash," he said.

He said there was a "blip" in inflation that was a "one off shift" following the GST rise in 1989.

"Like Y2K some people worked themselves into a lather about it, but it happened and the world didn't stop."