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Savings up + GST collections down = GST rate up?

Kiwi households are saving more than at any time since 1995 according to the latest national accounts.

http://www.beehive.govt.nz/release/household-savings-rate-positive-five-years

The flip side is with low inflation and lower consumption the Government’s GST take is down.

I’m not an economist but my understanding is even though households may be saving more, national savings overall aren’t necessarily any better off because of the push/pull effect of private savings and tax collections.

This was something the Savings Working Group considered in their report Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity: Final Report to the Minister of Finance published in February 2011.

As a countermeasure the Savings Working Group recommended an increase in the GST rate from 15% to 17.5% over other tax changes because GST is “less distorting than income tax on the saving decision”.

http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup/finalreport/30.htm

The political challenge with increasing GST to 17.5% is that our rate is already amongst the highest in the world when it comes to basic food, education, healthcare and utilities. Outside of the benefit system there doesn’t seem to be a simple mechanism to compensate low-income households for an increase in GST and this must surely put real pressure on our single rate broad-based regime.

Iain

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