THE PRESS MONDAY, FEBRUARY 3, 1986. The purpose of GST

Press, 3 February 1986, Page 12

THE PRESS MONDAY, FEBRUARY 3, 1986. The purpose of GST

The Government came to power with its firm assessment of the performance of the New Zealand economy. It argued that growth had been low over a long period and that the economy was performing as badly as that of any of the countries in the Organisation for Economic Co-operation and Development. The Government’s diagnosis was that the tax system in New Zealand stifled incentive, that people did not think it was worth making the extra effort because they would get so little return from the effort after they had paid tax.

Government Ministers carried charts throughout the length and breadth of the land which showed conclusively that, although New Zealand was in the middle range of countries in its over-all level of taxation, it led the developed world in the proportion of tax paid by low and middle income earners. The Government’s cure was to change the tax system so that a much greater proportion of New Zealand’s total tax was collected through an indirect tax: hence the goods and services tax.

The Government’s diagnosis and proposed cure have much to commend them. It would be unwise to believe that the downturn in New Zealand’s terms of trade and the restrictions placed on New Zealand’s exports have not had a serious impact. By no means all of our economic ills are attributable to taxation. It would also be naive to believe that efforts will not still be made, in the days after GST, to find ways of avoiding income tax. The main thrust of the thinking is still sound: New Zealanders have sometimes been reluctant to work overtime or to take risks because they will lose too much in the personal income tax. If there is more incentive to make effort, the groundwork for an economic recovery will have been laid. The introduction of GST and the reduction of personal income tax stand a reasonable chance of being successful in changing attitudes about being prepared to work longer hours, or more productively, and possibly more imaginatively. If the Government managed to set the economy on a genuine path of growth, it would have served the country and its citizens very well indeed. It has embarked on

the road to indirect tax and has removed a. host of controls on the economy and cut away subsidies. Clearly its most important tasks are to stimulate economic activity without disproportionate inflation that would wreck export industries and create hardship. The estimated revenue from GST is high; against this, the actual revenue from the fringe benefits tax has proved much lower than the estimates. This was to have been another tax source to relieve income tax. The 10 per cent GST tax may not in fact leave the Government a great deal of money with which to make significant changes in personal income tax.

Plans are being worked out with local authorities for what the Government calls revenue-sharing. This amounts to some kind of refund, yet to be determined, of GST gathered on local body rates, which are themselves part of the over-all tax burden. To the extent that the repayment will avert an increase in local taxation, this is well and good. Beyond this, any hopes for true revenue-sharing — bolstering local revenues from the State tax system — should be laid aside. It is not likely that the Government will have funds to spare; nor should it divert funds for this purpose if the result is to diminish the cuts it makes in income tax rates. Failure to make significant tax cuts would simply defeat one of the Government’s main economic remedies.

If there is a substantial surplus one day, it will be time enough to consider the revenue-sharing proposals then. Any diversion from its main aim now would be a serious softening of the Government’s approach. Such doubts as have been cast on the Government’s economic management so far have been because of the high interest rates and in the period in which the value of the floating dollar rose.

Doubts have not been cast on the Government’s sense of purpose. They are beginning to be cast on the working of the strategy. Even the Government itself has been making cautious, somewhat nervous, statements about the state of the economy in months ahead. This is not a time for it to lose its nerve or to deflect from its main course.