Wednesday, June 30, 2010

GST / VAT Dampens Productivity

I'm concerned. After the last rise, New Zealand took a while to grow again. Or did it? New Zealand GDP appeared to take off after 1986, but then flattened out from 1987 to 1992. There was another rise in GST in 1989. In 1991 there was a peak unemployment rate of over 11%. From '92 to '95 GDP grew and unemployment dropped.

It's hard to correlate GDP with GST changes. However, an increase in GDP with all other taxes being held equal, should lead to a decrease in domestic demand, and so a decrease in GDP. It could be that this is what occurred with the introduction of GST. The introduction of GST could have coincided with a large increase in purchasing prior to introduction (reflected in the GDP rise of that year), followed by flat demand for the five years after its introduction (exacerbated by the minor 1989 GST increase) and thus flat GDP growth which also led to high unemployment. This appears to be what happened from a cursory inspection of the data:

New Zealand GDP
New Zealand employment

So it would appear that GST/VAT rises are a damper on productivity and employment, at least in the New Zealand situation, at that time of its introduction. A 2.5% should have a shorter term effect..., but one perhaps exacerbated by the current recession, especially in the UK.