Would a GST holiday get you spending more?

Thursday, 4 June 2020

Do you understand how our tax system works?

Would you be buying more if you knew you weren’t going to be charged GST?

That’s a suggestion from Professor Tim Hazledine, of the University of Auckland’s economics department.

He first floated the idea of a “GST holiday” as the country moved from level 3 to 2 but said it was important as New Zealand contemplated a shift down to level 1, too.

“We need to get people actually spending rather than just giving them income.”

He said GST would normally bring in about $30 billion a year for the Government, or $2.5 billion a month. But it would probably be less at present because less money was being spent.

“[The cost] would be quite a lot but the Government has got the money and is prepared to spend quite a bit more.”

* Calls to cut GST, but how does it actually work?

* Reserve Bank may not wait three weeks for 'coronavirus special' on interest rates

There was a risk that people would save extra money given to them – such as through “helicopter” payments dropped on households.

Sharon Zollner said New Zealanders were being encouraged to act in ways that weren't in their own best long-term interests.

Too many people holding on to their money could create the situation they were hoping to avoid, by driving a deeper recession, he said.

“It’s not a good thing at this time of the cycle to have people say ‘thanks for the helicopter money I’m going to put it under my pillow and not spend it’. With GST you can only take advantage if you’re going out and buying something and getting the lower price.”

Retail prices should be kept the same, he said, so shoppers could see the GST reduction at checkout.

Retail NZ chief executive Greg Harford said it was a good idea. “We would really like to see a solid dose of fiscal stimulus. Taking GST off the price of goods would reduce the cost quite substantially.”

He said a number of retail businesses were on a “knife-edge” and concerned about whether they could stay open.

ANZ chief economist Sharon Zollner said a GST holiday would boost spending in the short-term. But it would be a hit to Government revenue and it could be difficult to bring to an end.

“It would be deflationary – only temporarily, of course, but it would be unhelpful for the Reserve Bank when they are already worried that inflation expectations are getting a bit too low,” she said.

She said a '15 per cent off' sale might not have as much impact as expected in an environment in which many people had decided the time was not right to make major purchases.

“There’s no shortage of great retail deals out there as it is as retailers attempt to get some cash-flow going, but households are in hunker-down mode.

'And the irony is of course that that is exactly what any financial adviser would recommend they do, if their income or job security has taken a hit. In that light, policies designed to boost near-term spending - and I’d put official cash rate cuts in the same basket - are actually attempting to get people to act in ways that aren’t necessarily in their own best long-term interests for the near-term benefit of the economy,' she said.

“With the loss of international tourism we’ve taken a huge income hit as a country – is this really the time to be persuading everyone to save less and live for the moment? If you want to save your retail and hospitality sectors, then yes, it is. But it has consequences down the track.”

She said a GST reduction would be a bigger boost for lower-income households because it would reduce the price of necessities, too.

'But spending on necessities is the least cyclical part of spending. If you’re arguing a policy would 'boost spending' you’re really talking about increasing discretionary spending on nice-to-haves.'