Reserve Bank suggests floating gst

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A floating gst rate is being suggested by the Reserve Bank as one way to help control inflation without pushing interest rates even higher.

The rate would be put up whenever inflationary pressures were building, to put the brakes on consumer spending.

The idea is in a Reserve Bank submission to a monetary policy inquiry which is grappling with ways to control inflation after mounting concern about the economic impact of high interest rates and a high dollar.

It comes after a proposal for a mortgage levy was floated by the Reserve Bank and roundly rejected as too contentious. A proposal to float the gst rate is likely to be even more controversial.

The bank has been cautious not to endorse the proposal, and appears to be lukewarm about its effectiveness, though it suggests it might be worthy of further study.

In its submission to Parliament's monetary policy inquiry, the bank said a floating gst rate would work by making items relatively more expensive at times when there was an intense pressure on resources.

That would encourage households to put off spending till the rate had been lowered.

Because gst had an across-the-board affect on borrowers and savers alike, it might smooth out peaks in both the exchange rate and interest rates.

"New Zealand savers would face an additional incentive to delay spending, without providing a matching boost to the returns available to foreign savers.

"The Crown would receive (and set aside) additional revenue which could later be spent by temporarily reducing the gst rate during a particularly weak period."

- © Fairfax NZ News