The Government’s COVID-19 wage subsidy has been a lifesaver for employers and employees alike. Trust me, some of the staff at the Taxpayers’ Union would know.
But New Zealand is now entering the final weeks of the programme, with further extensions looking unsustainable as a fresh COVID-19 outbreak highlights the prospect of a longer fight against the virus.
Businesses currently surviving on the wage subsidy will already be running the numbers on how to reduce work hours, cut pay, or even shut up shop. The flow-on effects of these sacrifices, compounded by the global downturn and the likelihood of further lockdowns, could be devastating for New Zealand livelihoods.
Policymakers are grappling with the question of how to mitigate these effects. The consensus is that we need to spur spending as the recession hits its peak, delivering a shot of energy into the economy and keeping workers attached to their jobs while the economic impact of COVID-19 passes.
That is the strategy, but the tactics are tricky.
During the last recession, the Reserve Bank stepped up with monetary interventions: it slashed the official cash rate from 8.25 percent down to 2.5 percent, making it cheaper to borrow and freeing up money that would otherwise by consumed by mortgage payments.
This time around, the cash rate is already near zero: the Reserve Bank simply doesn’t have the runway to repeat its 2008 tactic. In a sign of desperation, the Bank on Wednesday expanded its quantitative easing – i.e. money-printing – programme from $60 billion up to $100 billion, equal to about $54,000 for every New Zealand household. But this plan is set to run into limits set by the Government to prevent distortions of the market, and regardless, it is certainly not guaranteed to translate to increased consumer spending.
Politicians have recognised the Reserve Bank’s limitations and proposed their own interventions on the fiscal side. Examples include the Government’s interest-free business loan scheme, and the Greens’ plan to hike benefits. But these interventions are often unfairly targeted, wasteful, and create perverse incentives.
The Taxpayers’ Union has been exploring an alternative approach. As the International Monetary Fund pointed out in a report last year, our tax system already provides a sound, indiscriminate mechanism to encourage spending: the rate of our Goods and Services Tax.
A temporary cut to GST during the height of recession would leave more money in New Zealanders’ pockets but, more crucially, it would encourage households to bring forward future consumption before the tax goes back up again. It would suddenly become a good time to buy that new washing machine, kitchen set, or Toyota – recession be damned.
More spending would breathe life into revenue-starved businesses, so they can continue to employ New Zealanders and keep supply chains unbroken. And stimulus effects from a GST cut would kick in immediately, unlike those of, say, a major infrastructure project.
A version of this idea has worked overseas. In the wake of the Global Financial Crisis the United Kingdom’s Labour Government announced a temporary cut to its GST-equivalent Value Added Tax. Inflation expectations rose, surveyed consumers reported it was a good time to buy a major appliance, and sales of durable goods rose significantly.
If New Zealand’s GST were cut from 15 to 10 percent for 12 months, the Government would lose out on about $7 billion in tax revenue. That’s significant but would still only represent half the fiscal impact of the Wage Subsidy programme and could easily be delivered with the $14 billion the Government still has earmarked for its COVID-19 response.
Ironically, the biggest risk with a GST cut would be the temptation of politicians to make the change permanent. As far as taxes go, GST is a lesser evil – it raises revenue efficiently without punishing productivity or investment to the extent of income or company tax. Any cut to GST would need a sunset clause kicking in after a year to avoid long-term deficit effects or politicians replacing the lost revenue with increases to more economically damaging taxes.
Fiscal conservatives such as us at the Taxpayers’ Union don’t eagerly advocate Keynesian fiscal interventions. And we’d usually be loath to touch a fundamental plank of New Zealand’s simple, globally admired tax system. But when a consensus has formed around the need for stimulus, we need to provide constructive options, lest this mood translate into wasteful, politically motivated spend-ups – horse tracks for COVID-19, anyone?
A reduction in GST achieves the goal of fiscal stimulus without any of the political fishhooks. It’s a proposal that deserves debate.
Louis Houlbrooke is the Campaigns Manager at the Taxpayers’ Union. The Union’s briefing paper is available at www.taxpayers.org.nz/gst_cut.
54 Comments
“In a sign of desperation, the Bank on Wednesday expanded its quantitative easing – i.e. money-printing – programme from $60 billion up to $100 billion, equal to about $54,000 for every New Zealand household.”. AS a potential FHB Since recently I started to take those all things done by RBNZ personally. With every dollar they print I can feel how much they hate me and my little kid. Even monkey can hit the print button, find other ways , take someone else’s future not my kid’s!!!
Seems like they are suggesting the GST cut as an alternate to (i.e., instead of) the wage subsidy;
If New Zealand’s GST were cut from 15 to 10 percent for 12 months, the Government would lose out on about $7 billion in tax revenue. That’s significant but would still only represent half the fiscal impact of the Wage Subsidy programme and could easily be delivered with the $14 billion the Government still has earmarked for its COVID-19 response.
If so, the proposal is self-defeating - it reduces the level of government stimulus.
The idea has merit on retail transactions but I think it would be messy when you consider B2B transactions given the different GST accounting periods some businesses have and the different invoicing/payment periods amongst businesses i.e. 20th of the month, 30th of the month, pay on invoice etc. There's also no guarantee any funds saved from a reduction in GST would be spent - it may be saved. As I say.. a reasonable idea, but potentially complex for compliance
But pure Gold for consultants, who would be beseiged by enquiries about 'how can I change all my GST settings across Sales, Purchasing, e-Commerce, B2B integrations, reporting - oh, and for a defined period of time only'.
Hourly rates would skyrocket - this is Tricky Stuff at the best of times, and IRD will be only too happy to Audit the results.....
Good approach but if you want business to thrive we need to be more competitive with our corporate tax rates (Business tax rate) which is far too high at 28%. If you take a look at most other Western countries they have recently lowered their business tax rates to help them grow.
Though I think business related to property market including Landlords should remain at 28%, since they sent the cost of living up in our main cities causing more business expense. All other business should be allowed to move to 19% to enable to grow and and help our real economies in NZ.
Example of global corporate tax rates: Germany 15%, UK 19%, Switzerland 8.5% (max 22%), Norway 22%, US 21%, Japan 23.2%, China 25%, Hong Kong 16.5%, Russia 20%.
More info: Deloitte Corporate Tax Rates 2020 https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dtt…
According to the article there would be potentially $7 billion effect.. quite material. But the article is also pretty light on detail so you're probably right about actual effects to the individual HH. Certainly dropping GST won't be as noticeable as a wage subsidy continuation. Also a GST reduction doesn't help those who are already on absolute minimum outgoings. I would cut GST completely on fresh unprocessed food for a start
Define 'fresh/unprocessed'. The ATO rules on this very distinction run to many, many pages.
The ATO flowchart for Food gives some idea about what 'other jurisdictions' definitions are. It also depends entirely on product descriptions: if a 'biscuit' is described as 'a Rusk for babies' it's Exempt otherwise Not. Guess what description a few sharp manufacturers would adopt (until the ATO and confinement on Manus Is. loom....)?
What New Zealand needs is spending money in the hands of those at the bottom of the pecking order: the precariat. They are the ones who will spend every dollar they have and keep the economy humming.
There would be merit in abolishing GST on fresh fruit and vegetables, and on unadulterated grains and frozen fruit and vegetables. But a general lowering of GST is the last thing we need: there is no guarantee retailers would pass it on; much of the forgone tax would flatter the pockets of those who don't need it; and the state would lose revenue that could be spent on needed welfare.
New Zealand needs to put money in the pockets of the have-nots, those in precarious circumstances. The efficient way to do that is by immediately introducing a nontaxable, nonabating universal basic income for all adults, and a flat tax to pay for it.
During an hour-long interview with CNBC Asia Squawkbox on Friday morning, Reserve Bank governor Adrian Orr aired the possibility that the present government measures might be followed by "social transfers". That is exactly what we need, not reduction in GST.
Towards the end of the interview Orr was asked his views on the global economy and trade cycle. His reply:
"I think more about social cohesion, inclusion, and sustainability. Those are three very, very critical support paths to prosperity. Economic prosperity will not continue without cohesion, inclusion, and sustainability....
"Cohesion is very challenged at the moment across the country with the in-jobs, out-of-jobs ... have-nots with regard to assets; inclusion with people being included or excluded from the financial system is rapid; and the whole sustainability challenge.
"All of these distractions lower potential economic growth and wellbeing. And it's really frustrating to see a lack of big-picture thinking about that as opposed to national or regional battles."
Cohesion, inclusion, and sustainability are not the hallmarks of the Taxpayers' Union.
The present subsidies can only be claimed by those who are affected so those who cant dont get any help. For this reason a reduction in GST is more equable.
The argument that there is only one OCR is also flawed. Banks charge a variety of interest rates depending on their perceived level of risk. It seems equally simple for the Reserve bank to have interest rates that are related to more or less desirable transactions. Foreign exchange flowing into the country could be taxed lower and NZ currency leaving the country could be taxed higher. I really dont see that having one level of interest on the domestic dwelling up to $700000 and another level of interest for any other borrowing is hard to implement. There are too many lawyers and accountants gaming the system so make it simple and prove to ird that you comply. I've just been audited but my records and bookkeeping seem to have been better than most and I received a pass on all my records.
“In a sign of desperation, the Bank on Wednesday expanded its quantitative easing – i.e. money-printing – programme from $60 billion up to $100 billion, equal to about $54,000 for every New Zealand household.”. AS a potential FHB Since recently I started to take those all things done by RBNZ personally. With every dollar they print I can feel how much they hate me and my little kid. Even monkey can hit the print button, find other ways , take someone else’s future not my kid’s!!!
An OCR increase would have the reverse effect to what you want.. i.e. higher mortgage rates. An increase in mortgage rates for investment properties would hit you directly.. higher rents. You seem to be thinking perhaps that investment properties should be controlled in some way. They already are.. bright line test, LVRs plus the increase in Tenancy Act provisions favouring renters thus making it less attractive. Yields on rentals are already woeful, personally I don't know why anyone would bother.
A higher OCR would also flow through to our exchange rate, hitting our export sector, so another negative effect of that
This idea may have some merit but I cant see it being adopted.
The RBNZ is required to target a CPI circa 2% but the measures it has taken will not achieve that and they know it. They are only concerned with bank stability and minimising bank losses through loan defaults. They need to keep asset prices where they are or higher hence the talk of a negative OCR. Which helps borrowers and lowers the exchange rate. CPI targets not a priority despite their rhetoric. Gotta save the ship before you worry where it is headed. Man the lifeboats.
As is common knowledge the taxpayers union isn't actually a union. It's a front for a neoliberal right wing lobby group that also had it's handout for a taxpayer subsidy during the lockdown. A number of it's members are involved or have been involved with the Act party.
It's sole purpose is promoting neoliberal policy.
Some of us don't think cannabis is stupid.. (although smoking certainly is) - but that aside, monetary policy is rarely publicly discussed. Not because negative OCR and QE etc are not important (heck it worked before and in theory it might under these totally uncharted circumstances work again), but because your average news consumer is just not that interested in anything more than single issue politics or bipartisan narratives.. or perhaps I'm just cynical about the general lack of criticality many folk have..
How much future consumption can we "bring forward" before having none left?
That's basically where we've got to with interest rate cuts - capitalise the whole drop to zero into house prices, so that people have such a heavy lifetime debt burden that their future consumption will be crimped.
A really dumb idea. Why when the books are well out of balance and we are all thinking of how the government can generate additional revenue, would you cut GST by 33%?
On the other hand, lowering the OCR does not reduce government revenue, whereas lowering GST does. In addition to lowering government revenue this would play havoc with inflation, ie it would immediately lower significantly enough to put the country into deflation.
If this was thought up by the Tax Payers union as their best answer, they should all immediately retire and leave the thinking to people with some basic economic understanding.
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