10 Feb 2010

PM defends proposed GST increase

10:44 pm on 10 February 2010

The Prime Minister is defending a plan to increase the tax on goods and services after the main opposition party pointed out he had ruled out a rise during the election campaign.

John Key announced on Tuesday that the Government is considering raising GST from 12.5% to 15%.

The Labour Party is accusing Mr Key of misleading voters by saying one thing during the election campaign in 2008 and then planning to do the opposite now.

The Prime Minister says his comment in 2008 related solely to a suggestion that GST be raised to help cover the Government's financial deficit.

When asked on the campaign trail whether he would support a rise in GST to 15%, Mr Key said no.

However, he says the proposal being considered now is quite different to the scenario put to him then.

"I was specifically asked in relation to some comments from (Tax Working Group member) John Shewin, 'Would I raise GST to cover the deficits?'. He also floated increasing the top personal rate to 45 percent. Now, I said no, and I remain of that view: no to cover deficits.

"At that point, we hadn't considered GST as part of the tax switch. Will we do that? Maybe - find out in the Budget."

Mr Key says overall, the Government will be cutting taxes and rejects claims the proposed increase in GST will hit lower income earners more than others.

The Government says raising GST would offset the effect of an increase by increasing social welfare payments and making across-the-board tax cuts.

The move has drawn criticism from the Labour and Maori parties over concerns low income families will still suffer.

But Mr Key told Morning Report it is higher income earners who consume more and therefore pay more in tax to the Government. He believes the proposed tax reforms will deliver greater fairness and a more robust tax system.

Mr Key outlined plans for between $3 billion to $4 billion worth of personal tax cuts to be offset by a likely increase in GST and tighter tax rules for property investors.

Because the Government does not have huge amounts of cash, Mr Key said it has to move things around to allow it to invest in areas most critical for growth.

He said the long-term goal is to align the top personal, trust and company tax rates at 30%, but it may not happen in one step.

The Prime Minister declined to reveal specific details about tightening tax for property investors, saying only that the free ride is over. He told Morning Report on Wednesday the current tax breaks are not fair and more will be revealed in the Budget on 20 May.

Average family already struggling - Labour

The Labour Party says the Government's intention to raise GST will disadvantage the average family who are already struggling financially.

Leader Phil Goff says any increase in GST will hurt those who spend all their disposable income, and particularly those with children.

Maori Party co-leader Tariana Turia says she does not see how raising the price of food, as well as everything else, is going to help low income families.

Mrs Turia says the party will seek expert advice about the effects of the tax package as a whole.

The Salvation Army is also worried a possible increase in GST would hurt those on low incomes.

Social services director Campbell Roberts says he agrees with Mr Key's statement that New Zealand needs a tax system that rewards hard work, but the most vulnerable need to be protected.

Major Roberts said he is eager to see more details about how the Government would protect low income families.

The ACT party says it wants more focus on reducing Government expenditure.

Business view

Business New Zealand says the Government's tax reforms will yield only modest personal tax cuts and the decision to leave big property taxes off the table reduces the scope for larger tax cuts elsewhere.

A land tax and capital gains tax would have raised $11 billion. This compares with $3 billion to $4 billion from a possible rise in GST to 15% and other property-related changes.

Business New Zealand says this means any personal tax cuts will be at the more conservative end of the scale and is understandable, given budget deficits.

The Tax Working Group and the Government agree the tax system favours property over investment in companies and jobs.

The Property Investors Federation says it is too early to determine whether rents could be pushed up by the proposed tax reforms.

At present, investors in rental property can offset losses against other personal income and boost these through depreciation.

NZIER principal economist Shamubeel Eaqub says the removal of these advantages are still on the table.

Relief at no land tax

Federated Farmers is relieved the Government has rejected the idea of a land tax.

Economics spokesperson Philip York says looking at an increase in GST instead is a much better approach to take, as farmers already pay council rates, a form of land tax.

The federation considers GST to be very fair.