Key confirms GST increase being considered

BY MARTIN KAY

The Government is considering increasing GST to as high as 15 percent as part of planned changes to the tax system, Prime Minister John Key has confirmed.

In a statement to Parliament, Mr Key said a ''modest increase'' in GST - presently 12.5 per cent - ''to no more than 15 per cent'' was being investigated, but more work would be done before any decisions were made.

Any increase would have to be accompanied by across-the-board reductions in personal tax rates and ''upfront increases'' in benefits, pensions and Working For Families payments to compensate for higher prices, posing a difficult balancing act.

''Suffice to say, the Government would not embark on a policy of increasing GST unless it would benefit the New Zealand economy in the long term and unless it saw the vast bulk of New Zealanders better off.''

Mr Key said the total tax changes being considered amounted to a $3 billion to $4 billion package.

It is the first time Mr Key has confirmed the Government is actively considering an increase in GST, a central recommendation of the tax working group set up to find ways to rebalance the tax system.

He left open the question of whether any change to GST - along with lower personal rates - would be announced in the May Budget, but confirmed there would be changes to the way property is taxed.

However, he ruled out a land tax, a capital gains tax and a tax that would set a flat rate on the value of equity in investment properties.

He said a land tax would fall only on people who held their wealth in a particular form and would cause financial strife for those on low incomes. A capital gains tax would extend the tax net, but make the tax system ''more complex to adminitser and comply with'', while a flat tax on equity - known as the risk-free return method - would hit tenants with higher rents.

Mr Key did not specify what property tax changes would be in the Budget, but his statement was notable for not ruling out ending tax breaks available through depreciation.

The tax working group said that would give the Government an extra $1.6 billion a year.

Mr Key also left open the prospect of ending the ability of investors to write off losses on property against other income.

Increasing GST to 15 per cent would bring in an extra $1.9 billion, once automatic adjustments to benefits and superannuation payments are factored in.

Mr Key 's statement to Parliament - in which the prime minister maps out the Government's main priorities for the year ahead - focused heavily on efforts to rebuild the economy after the worst downturn since the Great Depression.

He said rebalancing the tax system was a major plank.

"We have a tax system that taxes labour and investment income at relatively high rates, taxes consumption at a relatively low rate, and generally gives money back to people when they invest in residential property.''

Other areas of focus included: improving public services; supporting research and development, innovation and trade; better regulation, including around the use of natural resources; infrastructure investment; and boosting education and skills.

He warned that the public sector faced a continued financial squeeze, with "most agencies" getting no additional funding for "several years".

They would be forced to reorganise their backroom functions to move services to the front line, making greater use of technology and sharing services with other agencies.

"We are keeping a tight lid on new spending over the foreseeable future, which will enable us to get the budget back into surplus and keep public debt under control."

Mr Key said changes would be made to the way crown research institutes were funded, but did not provide details. However, he said the CRIs could be 'more powerful engines of growth' and changes would include getting more of their research and knowledge into companies.

He also mapped out an extensive agenda in the area of free trade negotiations, with deals with Hong Kong and a collection of states in the Persian Gulf due to be signed this year. Negotiations with the United States, which wants a broad Asia-Pacific free trade zone based on the existing Trans-Pacific Partnership - which includes New Zealand - would be the most important focus, but proposed agreements with South Korea and India were also likely to progress.

Plans to increase work test measures for beneficiaries - a centrepiece National welfare policy at the last election - would also be significantly progressed, as would reforms to the education sector.

A proposal to allow mineral mining on Conservation Department land that is presently locked out was expected in the near future.

The Government would also pass tougher law and order provisions, including the 'three strikes' policy that would see violent criminals locked up for the maximum jail time for their third or subsequent offence.

- © Fairfax NZ News