British Finance Minister Alastair Darling yesterday applied an expensive measure to try to get United Kingdom consumers shopping again when he trimmed the valued added tax (VAT) in a pre-budget report.
Mr Darling has dropped the VAT sales tax from 17.5% to 15%, the equivalent of dropping New Zealand's GST from 12.5% to 10%.
Deloitte Dunedin tax partner Steve Thompson said yesterday the new rate would be temporary only, applying from December 1 for a 13-month period to the beginning of 2010.
"One of the extraordinary things about this announcement was that it, in effect, gives businesses one week's notice to alter their systems to account for the rate change.
"It would be unlikely that similar notice would be adequate in New Zealand. Our systems could not cope with such a fundamental change at short notice."
Reducing the VAT was "pretty unusual stuff" but the world was experiencing difficult times and the move could be a sign of things to come.
Given that everyone would be looking at what the new National-led Government might do to help lift New Zealand out of recession, the sales tax cut could be a pointer to the future, he said.
The timing of the UK tax reduction was impeccable, coming into effect just in time for Christmas shopping.
The hope was that increased spending flowing from the cut would pump 12.5 billion ($NZ34.8 billion) into the UK economy over the 13-month period.
However, it was not all good news, Mr Thompson said.
The British Government would be increasing taxes on alcohol, tobacco and petrol to ensure those products did not benefit from the cut in VAT.
"These increases will be permanent. The Government has also signalled it wants to increase the top personal tax rate from 40% to 45% from 2011.
"Time will tell whether this tax increase will occur given the UK is holding a general election in 2009 and personal tax increases may not be electorally popular."
Decreasing New Zealand's GST had not been seriously considered in recent times with both major parties ruling it out, he said.
That trend was likely to continue, especially if such a decrease was to come at the expense of personal tax rate increases.
Using either GST or VAT, or the wider tax system, as a lever to help control the economy was not unheard of globally.
Ideally, there needed to be at least a discussion about the economic benefits of using GST as a lever for the economy, Mr Thompson said.
An example of how GST could be used as an economic lever would be to treat it like the official cash rate.
New Zealand preferred to use monetary policy through changes to the OCR to regulate the economy and control inflation.
That had some drawbacks such as the lack of effect interest rates had on someone with a fixed-term mortgage.
"In contrast, changing the rate of GST would affect consumers instantly."
If New Zealand were to treat GST like the OCR, it would have three rates - a recessionary (low) rate, a normal rate and an inflationary (high) rate.
The rates would change depending on the state of the economy and whether the Government wanted to encourage or discourage consumer spending.
"In essence, this is what is being undertaken in the UK. Clearly, there are complexities and issues with any approach, but we suspect that the UK announcement will send officials scuttling away to report to ministers in the near term of whether New Zealand should consider the same or a variant."
