G. Option: Government taxes more - continued

Could we increase the GST rate to collect more tax?

Another way of collecting more tax would be to increase the rate of GST. Currently, GST of 15% is charged on most purchases. We could raise it to, for example, 17.5% from the 2017/18 fiscal year.

To show the difference that would make to our long-term financial position, Figure 12 shows three lines:

• Our standard orange "Spending path under 'Resume Historic Cost Growth' scenario" line, which tracks the average spending path that we would see if expense areas grow at the rates we have seen historically, also taking into account current legislative settings and demographic changes.
• Our standard blue "Spending path that maintains 20% net debt with tax revenue at 29% of GDP", which tracks the average spending path that would allow us to maintain net government debt at an average of 20% of GDP from 2020, assuming our tax take remains constant at 29% of GDP.
• The dashed blue "Spending path that maintains 20% net debt with GST at 17.5%" line, which tracks the spending path that would allow us to have net government debt at an average of 20% of GDP from 2020 if we assume that the GST rate is 17.5% rather than 15%.

Increasing GST and therefore the amount of tax we collect means that our spending path can be higher yet still achieve a stable level of government debt over time.

As Figure 12 shows, the fiscal benefits of raising the GST rate to 17.5% are fairly modest but still useful. Governments would still need to take other actions to close the gap between spending and revenue, or pay more borrowing costs. A GST rate of 17.5% would increase our tax take by around 1 percentage point of GDP, bringing our total tax take to around 30% of GDP.

A rise to a GST rate of 20% would collect about twice as much additional revenue than a rise in GST to 17.5%.

Figure 12 Three government spending paths - the impact of a 17.5% GST rate

How would a GST increase affect our living standards?

The equity impacts of a GST increase are complex to tease out. GST is a proportionate tax when measured on a lifetime basis, meaning that it is thought to affect people the same regardless of their level of income. On an annual basis, the distributional impacts of GST are more complicated. Measured as a proportion of expenditure, people of different incomes tend to pay about the same proportion of their expenditure in GST. But relative to incomes, lower-income people tend to spend more on GST relative to their incomes than higher-income people.[69]

A GST increase would also have different impacts on people of different ages. GST is often characterised as a tax on savings: a GST increase means that your savings can't buy as much as you had hoped. Older people are more likely to have significant savings, as they have had longer to accumulate them. In that sense, a GST increase might affect older people more.

On the other hand, assuming a GST increase lasts, the younger a person is the longer time they will pay the higher GST rate. So in that sense a GST increase would affect younger people more, although this is of course the case for any tax increase, not just GST, and any benefits of increased government spending the tax increase enabled can be enjoyed for longer too.

In terms of economic growth, consumption taxes like GST are generally considered to have lower adverse efficiency effects than other taxes, involving fewer disincentives for working, saving, or investing. However, GST is a tax on labour, as it means that people's wages cannot buy as much as they could before. That could affect some people's decisions about whether to live and work in New Zealand.

One risk associated with a GST rise is that it could lead to calls for certain goods to be exempted from GST. New Zealand's current GST regime is almost exemption-free, and consequently it is regarded as one of the most efficient consumption tax regimes in the world. Exemptions could undermine this efficiency without necessarily affecting the distributional impact of GST (distributional concerns being the main motivation for calls for exemptions). An exemption for food (other than takeaway or restaurant meals), for example, would not change the distributional pattern of taxable consumption over different income deciles.

There is also a risk around how much extra revenue we could expect to collect from a GST increase. It could encourage people to make more purchases from overseas, to the detriment of the local retail industry. Currently, people must pay GST on direct imports that are over $400 in value.[70] This threshold could be lowered, although there would be administration costs to enforcing GST payment.