Editorial: Raising GST justified in hard times

The Prime Minister has offered an assurance that the Government's debt track will be reversed from upwards to downwards in the May 28 Budget.

If so, a downgrade by credit-rating agencies, which would make borrowing harder and costlier, should be avoided. So, too, will the alarming prospect of Crown debt blowing out to 45 per cent of gross domestic product by 2013 and 70 per cent by 2023.

But significant surgery will be required to achieve that outcome. The most obvious candidate is the cancellation of the personal tax cuts planned for 2010 and 2011, which will save about $1 billion a year.

That can virtually be taken as read, and major interest in the Budget will, therefore, centre on other means by which the Finance Minister will fund counter-recessionary expenditure.

It is apparent that more pressure on the Government's borrowing requirements will be relieved by a temporary cutback in contributions to the New Zealand Superannuation Fund. This will save $2.4 billion annually.

Thereafter, however, the Government's thoughts have been less clearly signalled. It has asked Government departments to identify up to 10 per cent of their lowest-value spending, so savings can be made there.

But that is a small piece of the puzzle, and Bill English's eyes will inevitably have fallen on the more extravagant entitlements introduced by the previous Government. These embrace KiwiSaver, the Working for Families package, interest-free student loans, and 20 hours free early childhood education regardless of parental income.

KiwiSaver has already been scaled back, and a commitment has been made to Labour's 2006 student loan policy, while a greater attempt is made to get the loans paid off earlier.

But as with the tax cuts, such commitments may have to be reassessed, considering the sharp deterioration in the Government's finances. A pledge to maintain the early childhood subsidy has been given wriggle room by an Education Ministry recommendation that this should be redirected from high-income households to disadvantaged communities.

Indeed, there are too many instances of people being handed benefits they could afford themselves. This applies especially to those on handsome pay packets who receive Working for Families grants. Tighter means-testing should be introduced.

Mr English will definitely restrict new spending, but has indicated the tax structure, another obvious candidate for attention, is not on the agenda.

That cannot be so for long, given the size of the task facing the Government and the over-reliance of the tax system on company profits and personal income, particularly of the richest 10 per cent.

The Treasury has recommended more reliance on capital gains and GST because property and consumption are less vulnerable than profits and incomes to the attractions of other tax jurisdictions.

The Government is unlikely to seize the capital gains nettle but it might be persuaded to raise the rate of GST. Raising it from the present 12.5 per cent to 15 per cent would bring it into line with Britain's consumption tax.

Inevitably, since sales taxes are paid by everyone, the Government would be accused of taking from the poor to finance income tax cuts for the rich.

And an added tax on spending might be seen as a drag on any recovery from the recession.

But its impact on prices would be no worse than the public routinely absorbs from the likes of oil price movements. Any temporary disadvantage to the economy must be set against the sustained damage that the country would face if counter-recessionary spending is not accompanied by measures to limit the looming blow-out in public debt.