'15 per cent GST' danger within five years

By Audrey Young, Martin Johnston

A tax expert predicts GST could have to rise to 15 per cent within five years, to dig the country out of deficits delivered by the worsening world economy - and big election promises.

John Shewan, a specialist tax partner and chairman of PricewaterhouseCoopers New Zealand, said last night that GST could hit 15 per cent and the top personal tax rate increase to 45 per cent.

Goods and services tax now adds 12.5 per cent to purchases and the top personal tax rate is 39 per cent.

Both National and Labour were quick to distance themselves from the suggestion this morning.

National leader John Key said told a press conference this morning that if National is elected and does a "half decent job" at growing the economy, then increasing GST and the top tax rate will not be necessary.

He said his government would be borrowing because "in the short term everyone's going to be borrowing because we've got an anticipated deficit for the year and the year after," Mr Key said.

Labour's Finance Minister Michael Cullen said people "needed to stop panicking" about the 10-year projection based on Treasury forecast.

It only allowed for 2.5 per cent growth each year.

"I'm saying absolutely no (to increasing GST to 15 per cent) because there is no need to panic at all."

Mr Shewan's warning came as Prime Minister Helen Clark, in a dramatic change in Labour's election campaign, declared that her party had closed its wallet and would not offer any further big spending policies before election day.

She emphasised the gravity of the financial and economic risks and said the election campaign had been turned "completely on its head" by the global crisis.

She said she would spend the rest of the election concentrating on the contents of a promised December economic stimulus package.

"New Zealand's reaction to the global downturn will be crucial to determining our country's living standards for years to come.

"It's important that we in Labour are utterly realistic about the international context in which New Zealand finds itself."

Mr Shewan, who chairs the NZ Tax Working Group of the Australia New Zealand Leadership Forum, told the Chartered Accountants tax conference in Christchurch at the weekend that it was conceivable taxes might have to go up to address the deficits.

Last night, he told the Herald that with the revised Government fiscal outlook forecasting a decade of Budget deficits, Labour's and National's spending promises and the global economic situation, either Government debt would expand unacceptably or taxes would have to rise.

"Mathematically that must happen, one or the other."

He supported National's and Labour's tax cuts, but said that whichever major party led the next Government could face "the real prospect of having to increase taxes rather than decrease them within the next five years".

"It wouldn't be inconceivable to end up with a GST rate of say 15 per cent and top personal tax rate of 45 per cent. Now I'm not saying that is going to happen ... "

The Government ran large deficits in the late 1970s and early 80s.

"In fact we got ourselves into such a difficulty in the early 1980s that we had a real financial crisis which necessitated wholesale reforms. I don't think we would want to end up in that position again."

New Zealand Institute chief executive David Skilling said changes will need to be made in the next year but it is premature to speculate what those could be.

The head of the private think-tank said that although the economy is slowing, raising GST and the top tax rate is unlikely.

"You've got the Government talking about a mini-budget in December, although from what I understand there are not many details, and National is certainly juggling things as well but the complicated factor here is no one knows what the environment is going to look like even six, 12 months down the track," Dr Skilling said.

He said spending will need to be cut or taxes raised to "square the ledger" but deficits in the Government's books should be allowed for.

"Both parties are going to need to cut their cloth according to the challenging times and exercise a bit of caution," Dr Skilling said.

Council of Trade Unions economist Peter Conway said raising GST is unlikely but the creation of a new top tax bracket could be looked at.

He said the CTU is not advocating for the creation of a higher tax bracket but it could be looked at in the future.

Mr Conway said politicians are being careful about the promises they make.

"They're trying to be expansive on the infrastructure side but fairly careful on the operating side," Mr Conway said.

Campaign change

Helen Clark announced Labour's campaign change at a party rally in Wellington.

"I have not come here today to announce any more significant spending initiatives. Nor do I plan to announce any more."

The election was not about who offered the biggest tax cut but who people trusted to move the economy forward.

It is understood that certain yet-to-be-announced Labour election promises have been shelved - such as a further extension to the paid parental scheme.

And any new Labour promises will have a measure applied to them - whether or not they would contribute to economic stimulus.

Helen Clark said the package would be announced within 40 days of Labour being re-elected - December 18 - and she compared it to the 100 days of action National leader John Key is planning if he is elected.

"A change to a leader with the learner wheels on no longer seems as interesting as it might have even a few weeks ago," Helen Clark said.

Mr Key also sought to seize the initiative at the beginning of the second week of the campaign by both offering and seeking from Labour a greater degree of bipartisanship towards deposit guarantee schemes.

One for retail deposits was announced on Sunday last week, at the same time as Australia, and Finance Minister Michael Cullen confirmed yesterday that officials are exploring a scheme to cover wholesale deposits - banks lending to other banks.

He welcomed Mr Key's statement and assured him he would keep in close contact with National finance spokesman Bill English.

Labour's last big-ticket items announced last week - totalling $618m over four years - were phasing out the parental income test on student allowances, adjusting abatement rates for beneficiaries so they can earn more in part-time work, and boosting the number of modern apprenticeships.

Helen Clark announced a December mini-Budget at her campaign launch in Auckland, identifying infrastructure projects that could be brought forward, including rail projects, sewerage and water-treatment schemes and capital works for schools.

Dr Cullen has not put any figures on the extra borrowing that would be acceptable for such a stimulus package. But if Labour's campaign is going to concentrate on such a package, more detail about the projects and funding is likely to be given.

Helen Clark yesterday painted a picture of a New Zealand economy vulnerable not only to declining growth rates but to the slowing economies of major trading partners China, Australia, the United States, Japan and Europe.

GDP forecasts for the next year in NZ's key markets were "simply dismal" - 0.1 per cent in the US, 0.2 in the whole of Europe, 0.5 in Japan and only 2.2 in Australia.

- with NZPA

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