$4b in tax cuts coming

GAIN AND PAIN: John Key, with Bill English behind him, said raising GST would give the Government room to move on tax cuts.
GAIN AND PAIN: John Key, with Bill English behind him, said raising GST would give the Government room to move on tax cuts.

Up to $4 billion in personal tax cuts could be delivered in October as the Government looks to raise GST and end some tax breaks on property.

The prime minister is understood to be aiming for tax cuts worth well over $20 a week to the average worker to compensate for a rise in GST from 12.5 per cent to 15 per cent.

The rise was signalled in John Key's opening speech to Parliament yesterday as the Government comes under pressure to deliver on its promise of an economic "step change".

The changes appeared to hit the spot with business, although some were waiting for the detail in the Budget, while Labour said increasing GST would boost the rich at the expense of the poor.

Mr Key said no final decisions had been made on GST, but the rise seems likely to be confirmed in the May Budget. The package was "potentially [worth] somewhere in the order of $3 to $4 billion so it gives us quite a lot of room to move in terms of personal tax cuts and potentially corporate tax cuts [which] we haven't ruled out".

The Government proposes a rise in benefits, superannuation and Working for Families payments to compensate for the GST rise, which would add about $20 a week to the average household's living costs.

The upfront compensation is understood to have been a key factor in ensuring the Maori Party would not cross the floor on what would be a confidence and supply measure, despite its opposition to a rise in GST.

The top 38c personal tax rate is likely to be dumped and the Government has not ruled out dropping it as low as 30c after Mr Key used his speech to reiterate National's commitment to personal tax cuts for all.

He singled out tax changes as the Government's biggest area of economic reform this year, but also detailed controversial plans to boost petroleum production and lift the ban on mining and prospecting on parts of the conservation estate – claiming these had the potential to "unlock" billions of dollars in mineral exports by 2025.

The Government would also reform the benefit system, he said.

Raising GST to 15 per cent would add 2.2 per cent to prices and raise roughly $2 billion. A further $1.7b would be raised by removing some of the tax breaks enjoyed by property investors, including the ability to claim depreciation.

But the Government stopped short of a land tax, a comprehensive capital gains tax andother measures proposed by the Tax Working Group and others to shift investment from housing into other areas.

Labour leader Phil Goff opposed an increase in GST. "People who earn the least are going to be the worst affected and we have no confidence the Government will look after those people."

WHAT THE TAX CHANGES WILL MEAN

Dropping the 38 per cent top personal rate to 33 per cent would deliver tax cuts to those earning over $70,000.

Someone on $80,000 a year would be about $10 a week better off, and someone on $90,000 would get an extra $20 a week.

John Key, on $390,000 a year, would get about $291 more a week.

The average household would need a tax cut of well over $20 a week to compensate for the rise in GST.

In 2007 the average Kiwi household spent about $950 a week, including groceries, fuel, clothing and healthcare, about $106 of which was in GST.

Lifting the tax to 15 per cent would add an extra $21.25 to the bill, and a 20 per cent rate would add $63.75.