GST rise worries low earners

Munish Pathak is anxious about how the rise in GST will affect his wife and him. Photo / Natalie Slade

Low-income earners may come out better off in the short term after the GST increase expected to be confirmed in this week's Budget - but the real pain may come later.

Herald calculations show that expected income tax cuts will more than compensate even in an extreme case of a couple earning only just above the minimum wage and paying GST on almost everything, including rent.

But beneficiary advocates fear the immediate gain will be wiped out quickly if businesses take advantage of the GST rise to pass on other cost increases too.

"I think a lot of businesses have been holding their prices and I think prices will go up not just by 2.22 per cent [the direct effect of raising GST]," said Beneficiary Advocacy Federation spokeswoman Kay Brereton.

"That's going to be a real problem for our clients."

Munish Pathak, who earns $13.26 an hour as a security guard at Auckland City Hospital, expects to be worse off.

"Even without the increase in GST it's really hard to accommodate everything," he said. "This is going to make it much harder."

Mr Pathak, 26, met his Kiwi wife Sarah, now 20, in Wanganui. She is in her final year of a nursing degree and gets a student allowance of $150 a week, reduced slightly from the maximum because of her parents' income.

Mr Pathak works 60 hours a week to make ends meet, bringing home $635 after tax. But he is still repaying a bank loan which he took out while out of work which costs him about $78.50 a week.

The couple pay $245 a week for a room in a Morningside hostel, the Dossah, sharing a kitchen with other residents.

Such "long-stay accommodation" is subject to a special GST rate of 7.5 per cent because it comes with some "hotel-type" services such as linen and crockery.

They spend the rest of their income on food, petrol, telephone and other living costs, all subject to GST at 12.5 per cent. Raising GST to 15 per cent, as expected, will raise their general living costs by $10.27 a week and their rent by $3.42.

The long-stay accommodation rate is fixed at 60 per cent of the standard GST rate, so it will go up from 7.5 per cent to 9 per cent.

To compensate, Mr Pathak can expect a tax cut of $17.25 a week if the middle-income tax rate is cut from 21 per cent to 19, and the bottom rate from 12.5 per cent to 10.

Mrs Pathak can expect her net student allowance to go up by about 2.22 per cent, or $3.33 a week. The couple's total income boost of $20.58 would more than cover their immediate GST increase of $13.69, making them about $7 a week better off.

However, their landlord, Abacus Unitel general manager Mike Newman, said their rent would go up by more than the GST increase because he held off the annual adjustment in February so he would not have to raise prices twice in one year.