GST hike would mean 2pc inflation hit, says Stats NZ

Statistics NZ says a GST increase to 15 per cent would add 2 per cent to the Consumers Price Index. Photo / Herald on Sunday.

Statistics New Zealand says any hike of GST to 15 per cent - as suggested by the Government's tax working group this week - would increase inflation by 2 per cent.

Chris Pike, prices manager for Statistics New Zealand, said some commentators had claimed that a 2.5 per cent raise in GST would result in a price increase of the same amount.

"A product priced at $100 excluding GST currently sells for $112.50. If GST were increased to 15 per cent, that product would retail for $115, an increase of 2.22 per cent, not 2.5 per cent," said Pike.

Pike said there was also a second factor that had to be factored into the equation.

"Not all goods and services in the CPI (Consumers Price Index) basket are subject to GST," he said.

"Housing rentals, school donations, and credit services are not subject to GST. Those items make up about 9 per cent of the CPI, so about 91 per cent of the cost of the CPI basket would be affected by a change in GST."

Pike said factoring in the CPI basket items not subject to GST would lead to an overall CPI increase of 2 per cent.

The figures were based on the assumption that any new GST regime would apply to goods and services in the same way the current system works, Pike added.

ANZ chief economist Cameron Bagrie agreed with Statistics NZ's clarification.

"I think they are being on the mark," said Bagrie.

"The important thing here is it's not going to be the first round effects, it's going to be the second round effects and really whether [businesses] take it as an opportunity to slip in additional price increases not necessarily related to GST increases."

Bagrie also agreed that the CPI items not subject to GST would drag the overall increase down to 2 per cent.

He said the public needed to be wary about panicking about the situation, as the tax cuts needed to compensate for higher GST would not need to be particularly extreme.

"Yes, some people do end up paying more, but there is a mitigant on the other side which will come in the form of tax relief, and you don't need huge, substantial tax relief to mitigate a 2.2 per cent jump in food prices."

Bagrie said the Reserve Bank would "remain alert" to the second round impacts of businesses taking the opportunity to slip in additional price increases.

"That's the stuff the monetary policy ultimately needs to respond to."

He said the impact on the wider economy, in the medium term, would be positive.

"It is all about fostering a more efficient allocation of capital," he said.

Business NZ chief executive Phil O'Reilly said most business owners would not introduce additional price increases if GST were raised to 15 per cent.

He said competition meant such a tactic would not make sense - customers would simply head off to a competitor which had not raised its prices.

"Competitive forces in the economy will tend to mean that you keep retailers and businesses honest," said O'Reilly.

He said the public was "not stupid" and would realise if prices had increased by more than 2.5 per cent.

A GST raise would initially have a negative impact on businesses, although the corresponding tax cuts would help compensate for any losses, said O'Reilly.

Consumers would quickly become accustomed to the 2.5 per cent increase in costs, he added.

O'Reilly said the biggest impact of a GST increase would be felt by people who spend 100 per cent, or more, of their income each week.

"Here I'm thinking about beneficiaries, the very low paid and so on. Those really are the people the Government has got to turn its mind to."