Red Alert

Bollard in 1992 on the impact of GST increases on the economy

Posted by on May 19th, 2010

Reserve Bank Governor, Alan Bollard, wrote a paper in 1992 titled “New Zealand’s Experience with Consumption Tax”.  It dealt with the implementation of GST in NZ.   He wrote “in 1989 when GST was increased to 12.5% the effect on retail sales and subsequently on growth was marked; after experiencing signs of a pick-up the economy dropped back to recession the following year”. 

When asked about history repeating itself in the FEC select committee today, Dr Bollard said that the impact of the proposed GST increase on the economy would depend on the total tax package balance.  Interesting.  Remember when GST was increased by 2.5% in 1989, kiwis at the top end had just received massive personal tax cuts in 1988: the top rate dropped from 48% to 33%. 

I hope for NZs sake, history does not repeat itself with this current budget, because it all looks awfully familiar.

20 Responses to “Bollard in 1992 on the impact of GST increases on the economy”

  1. Oliver says:

    It doesn’t take a rocket scientest to figure out that “it depends on the overall tax package” is a really fair (and quite obvious) answer given economists consider a number of variables before coming to conclusions. Especially someone that has grown enormous amounts of experience over the past 20 years looking at all this data.

    Or by posting this are you implying that it is a bad answer and that you know better? It might pull political friends, but it doesn’t hold much water.

  2. frew says:

    Stuart, this post is one of the reason’s why people don’t take Labour seriously. This post is a half truth designed to score cheap points, without debating the economics of the tax changes.

    When GST was introduced and then raised in the 80’s, it was done without a income tax reduction, which meant it was a tax increase. When tax goes up, people have less money so spend so consume (or save) less.

    The tax changes in the budget are effectively two separate proposals, one is a gst increase and an income tax drop for all, with benefit/super increases. It is a revenue neutral scheme which will leave all New Zealanders no better or worse off (to within plus or minus $5 per week). It will therefore have little effect on the combined rate of consumption and savings in NZ. It is therefore totally different to the GST changes of the 80’s.

    The second tax change in the budget is a massive drop in income tax for high wage earners paid for by massive tax increases on property investors/speculators. It will in theory have little effect on consumption and savings in New Zealand.

    Of course the reason for the GST changes is because one major problem with the NZ economy is debt fuelled over consumption and a lack of savings. If there is a corresponding decrease in consumption from a GST rise, it will be followed by a rise in savings, which frankly can only be a good thing.

    You could argue that the property tax changes will increase rents on the poor, that the money raised should go to low income tax cuts or increased govt spending/reduce debt. But trying to scare voters into believing that these tax changes will hurt the economy will win you no support.

    I must admit, this sort of post is a little frustrating. Frew, if you had read my post (which is shorter than your comment) you would have seen that I said the GST increase from 10% to 12.5% was just after massive personal tax cuts – the top rate had been slashed from 48% to 33%. This was the major premise behind my post – taxes at the top end had been cut in 1988; not 12 months before the 2.5% increase in GST, so people did have a lot more money in their pockets, but the economy still suffered as a result of the increase in GST. Another point – yes, saving is impt – and that is the short-to-medium term goal, but at a time of recession, we actually want people to spend more money so as to create demand etc etc. And yes, as you state in your last paragraph, we will argue these points because they are correct.!

  3. Spud says:

    I’m dreading the budget :-( :-( :-(

  4. sean14 says:

    Stuart, presumably you will be asking your leader to commit to reversing today’s anticipated GST increase when Labour is next in power?

  5. MikeG says:

    frew – you seem to have mis-read the blog post. Stuart was referring to when the rate was increased from 10% to 12.5%, NOT the introduction of GST. So it does seem very familiar to 1989 – a rise in GST and a drop in the top Personal tax rate, and the subsequent effect on growth was not good.

  6. frew says:

    MikeG – this doesn’t seem similar to to ’89 because there are universal income tax drops and benefit/super increases now, whereas there wasn’t in ’89. There is no money taken from ordinary NZers with the GST increase here, whereas there was in the past.

  7. MikeG says:

    Well let’s see if there are ‘universal income tax drops’ later this afternoon. If changes also effect property, then those people on low incomes and renting may well be paying more to their landlords as they seek to make a return on their investment. Those increases will easily take care of a few cents a week personal tax decrease. In short, a universal income tax drop does not necessarily equate to a reduction in total tax paid by an individual.

  8. jennifer says:

    Stuart, can it be so that those saying that cutting the top tax rate will deliver growth and jobs and prosperity are not being completely honest? If the rate has been cut from 66 to 48 to 33 and soon to 30, and we have continued to slip behind as a nation, can it be that tax is in fact not the silver bullet?

  9. Loota says:

    Good question. Countries that have gotten truly wealthy didn’t do it on tax cuts, that’s what banana republics do.

    Coutries that get wealthy do so by developing advanced industrial and advanced services based economies, then they can afford the tax cuts and still generate more Govt revenue.

    The Right’s plan is cart before the horse stuff.

  10. Andrew says:

    @Spud – “I’m dreading the budget”

    Just like me and my fellow Right Wing Nut Jobs dreaded every single budget under the Labour administration. Always the same, Labour supporters will always hate National budgets and National supporters will always hate Labour budgets.

    The theme of this budget is one that we should have had years ago when times were good. Tax consumption and ease up on taxing earnings. Closing up loopholes around property investment should have been done years ago and maybe more kiwis could now afford to buy their own homes. Labour sat on the biggest property speculation bubble of our time and did nothing! Shame on you, a plague on your houses! The tax system is a mess with loopholes everywhere that you could drive a bus through.

    The top tax rate was a nasty spiteful tax that Cullen should never have introduced, especially given the rate was 65k that it came in. Set the threshold at say 150k and that would have much more support.

    Happy budget day, your all sad, but not :)

  11. Spud says:

    “Just like me and my fellow Right Wing Nut Jobs dreaded every single budget under the Labour administration.” – You know you’re right :-) In nine years I have never given a thought to any potentially unhappy tories out there on budget day.

  12. Andrew says:

    Likewise :)

  13. ghostwhowalksnz says:

    This is so funny…
    “Labour sat on the biggest property speculation bubble of our time and did nothing!”
    hello !! Labour was a minority government for 9 years.

    But when they passed a election promise … you slog them off … for doing something

    “The top tax rate was a nasty spiteful tax …”

    Andrew , you sound like one of the proverbial rich pricks- full of contradictions, and probably did well out of the bubble – but now wants to blame someone else other than your self

  14. Loota says:

    Labour could have done much more to direct the flow of capital into productive enterprise, export manufacturing, enterprises to earn hard foreign currency and the like.

    I believe that David C. and David P. both fundamentally get that this now needs to be urgently done.

  15. Andrew says:

    “Labour was a minority government for 9 years.”

    So bloody what, you never tried to fix the speculation bubble? The greens wanted a CGT, so what was the hold up? I still think we should have a CGT on property except the family home.

    “Andrew , you sound like one of the proverbial rich pricks- full of contradictions, and probably did well out of the bubble – but now wants to blame someone else other than your self”

    Ha! Nope, only own one house for my family and I, well the bank owns it actually. I was in the UK for most of the bubble and how have come home to buy a house with an extremely strong NZD and weak GBP so the pounds went far enough for a deposit and nothing more.

    Im not a rich prick, but do pay the top tax rate. Single income family and doing not too bd, but certainly not a rich prick.

  16. Loota says:

    A progressive style CGT which applies to everything but the family home is a good idea.

    e.g. you get one CGT free home sale every three years, and then CGT gradually ratchets up for every sale thereafter within the period.

  17. ghostwhowalksnz says:

    Australia has a CGT but has/had a housing bubble. Your next question was?.
    The real problem was speculative lending . ie banks

  18. Loota says:

    Well the old story, both demand and supply of money is part of the issue.

    At least with a CGT the Government gets additional revenues to use to provide services and infrastructure to the citizenry.

    Might even fund making the first few thousand dollars of income completely tax free.

  19. Tracey says:

    This budget wont be a panacea, as no recent budgets have been… I know a large number of people who voted national who are upset that they will not make REAL change in tax system amongst others. Doesnt mean they will suddenly vote labour, but does mean they are feeling a little duped by the election message…

  20. Rebecca says:

    Stuart so what you’re saying is that the NACT of today are merely copying the Labour of yesteryear?