GST will stimulate—forecast

Press, 19 June 1986, Page 1

GST will stimulate —forecast

By

SIMON LOUISSON

in Wellington

The GST package will stimulate the economy out of the present recession by the end of the year, according to the Institute of Economic Research. The main reason for this prediction stems from the tax cuts to be introduced with GST on October 1, effectively reducing Government revenue by $1 billion. Although this will boost the deficit to about 5 per cent of gross domestic

product, it will stimulate the economy to allow a recovery in 1987, the institute says in its June "Quarterly Predictions.” However, the recovery could be threatened if the next wage round was above the institute’s prediction of 10 to 12 per cent. That would result in a more substantial fall in employment than the 5000 predicted by the institute. Much will depend on wage bargainers’ reaction to the 5 per cent increase in the consumers’ price index which will be

caused by GST. Because of the direct tax cuts that will come with GST, a rise of only 9.5 per cent is required to maintain real living standards. A wage rise within the institute’s predictions would result in a 0.5 to 2.5 per cent gain in real incomes, in spite of a predicted inflation rate of 17 per cent. Such a rise would further stimulate the economy. The institute says there have been confused signals about the progress of

the recession, with retail sales up in real terms and unemployment only marginally up, counterbalanced by the difficulties being experienced by farmers. This is explained by the change in structure which is taking place in the economy. In spite of the latest sharply reduced export figures, the institute still expects exports to rise by 2 to 3 per cent in 1986-87. These will be helped by the continuing growth, about 3 per cent, in New

Zealand markets overseas. A fall-off in exports in the last quarter is expected to be only temporary and the balance-of-payments deficit should fall rapidly after the June quarter, to be about $l2OO million for the year to March, 1987, compared with $2.5 billion in 198586. The exchange rate is predicted to depreciate to about 60.5 for the tradeweight index in March, 1987, which is 64.3 at present.

However, if the rate does not decline the pressure on exporters and those competing with imports will intensify. In the fanning sector, the institute says, there will be a significant falloff in discretionary spending — on fertilisers, maintenance and development, and farm labour. The over-all effect will be uncertain, but an agriculture operating surplus of $2 billion for this year, followed by a fall to $l.B billion the next year, is forecast