In the three months ended 30 September 2010 the Government collected 15.8% less GST than forecast. That’s about $600m less than budgeted.
The big increase in consumer spending anticipated before the 1 October GST rate rise didn’t happen.
In 1989 when the rate increased from 10% to 12.5% consumer spending rose 2.4% in the quarter immediately before the increase. Our Government forecast GST collected in the September 2010 quarter to be 21% higher than the same quarter in 2009.
That seems like a pretty big jump to me. As it turned out actual collections were up 2% on the same period last year. That’s more in line with the 1989 experience.
Was it really that likely Kiwis would go on a huge pre-rate increase spending spree? I think these results show consumers kept their hands in their pockets and just didn’t have loads of discretionary cash to spend on non-essentials. Still, it’s easy to be wise after the event.
In line with historic experience Treasury expect a slump in consumer spending in the December quarter but now say they have probably overestimated the size of the decrease. In 1989 the drop off in consumer spending following the rate change was roughly equal to the increased activity immediately beforehand.
On that basis a small decrease in retail spending could be predicted for the December quarter, say around 2%. My prediction though is it won’t even be that much. In 1989 the rate change occurred on 1 July so it wasn’t followed immediately by the xmas retail rush. Also, in 1989 the rate increase was not accompanied by income tax reductions.
I think the combination of lower personal taxes, the usual xmas hike in activity and modestly increased consumer confidence going into summer will mean this time, unlike in 1989, retail spending immediately after the rate change will increase, not decrease.
Barrister, Director and Consultant specialising in tax, family enterprise governance and succession, helping start ups and entrepreneurial enterprises grow safely and international expert on value added tax policy and implementation.