Option: Increase the GST rate to 17.5%
Fiscal implications
Figure 4 shows the difference increasing the GST rate from 15% to 17.5% from the 2017/18 fiscal year could make to the Government's long-term fiscal position. The impacts are fairly modest, but a higher GST rate means that we could have higher spending and still maintain net government debt at 20% of GDP on average over time.
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.
Broader living standards implications
A GST rise would have fewer efficiency implications than some other revenue-raising options, but even so GST is still essentially a tax on labour so we would expect any economic growth effects to be negative rather than positive.
In terms of equity, the costs of a GST increase would be distributed proportionately across different income groups, at least if measured on a lifetime basis.
A GST increase could give rise to calls for exemptions. It could also prompt people to buy more goods from overseas, decreasing revenue and also potentially damaging the local retail industry.
- Figure 4 Three government spending paths - the impact of a 17.5% GST rate
