The day everything cost 10% more
THE brain drain would be reversed, pay packets would be fatter, and lipstick would be cheaper.
With the introduction of GST on October 1, 1986, Prime Minister David Lange reckoned that, in six months’ time, ‘‘You’re smiling’’. And not just about the cheap lipstick.
Now, 26 years since Sir Roger Douglas’ sweeping tax changes introduced the goods and services tax, it appears few are smiling about the tax, which has risen from 10, to 12.5, to 15 per cent. But who ever smiled about taxes?
Ian Dickson worked in Treasury in the mid-1980s.
He remembers Sir Roger coming over in 1984, shortly after Labour came to power.
Out of a Muldoon-era climate of fear in which bureaucrats would nervously wait outside the prime minister’s office, the new finance minister was a polar shift.
‘‘He came into a meeting on the 12th floor of Treasury. He literally came in, took his jacket off and rolled up his sleeves . . . it was like, ‘Wow, a different way of doing things’.’’
Labour had won the 1984 snap election in July. By November it had a Budget and GST was on the radar. Unlike previous tax changes – ‘‘usually done in urgency in the dead of night,’’ Mr Dickson said – the 1986 tax reforms went through the laborious select committee process. Their launch had to be delayed from March to October as a result.
Now retired from Parliament, Sir Roger said this week that GST had ‘‘stood the test of time’’.
Labour had inherited high debt, a crippling deficit, and rocketing inflation. ‘‘We had work to do, didn’t we.’’
Income tax rates – reaching up to 66 per cent – were cut and a wholesale sales tax on so-called luxuries, such as washing machines and cameras, was abolished.
In its place, GST put a blanket 10 per cent tax on all goods and services. It was part of a plan to reduce debt, and improve productivity and growth.
Sir Roger said it worked. ‘‘Absolutely, we could have finished the job,’’ he said, adding that health, education and welfare remain ‘‘undone’’.
From the outside, Shalimar Dairy on the corner of Willis and Aro streets looks much as it did in 1986. But the dairy business has changed since a time when people bought significant groceries at their corner store. Owner Neil Patel was there in 1986, serving a less affluent clientele than the Aro Valley of today.
‘‘[GST] was good for the Government, not good for the shopkeepers – the businesses collected for them. People were not happy, businesses were not happy,’’ he said.
Labour MP Trevor Mallard – a backbencher for Hamilton West at the time – remembers some distaste for GST in the party, which worried it would hit the poor hardest. There was also concern the drop in income taxes would not be made up for by money gathered from GST.
He now says that suspicion proved incorrect. ‘‘It meant it was better to spend your time on earning the money rather than avoiding the tax.’’
The removal of the sales tax would mean some items – icecream, soft drinks, sweets and car parts, for example – ended up costing less, even with GST, The Dominion reported in 1986. Cyclax lipstick would drop from $8.20 to $8.05.
For most though, there were increases. On September 30 there was a surge of sales at bottle stores and supermarkets as people stocked up.
Sir Roger remembers criticism of GST on rates, ‘‘a tax on a tax’’, and the ‘‘knowledge tax’’ on books.
But come October 1 critics were muted. Within weeks, approval of GST was about 70 per cent.
In 1986, Sir Roger promised the new tax regime would reverse the brain drain.
The next year the ‘‘brain drain’’ to Australia did drop slightly, to 19,300, but it didn’t last. In 1988, more than 28,000 hopped across the ditch. In 2012, the number had reached almost 40,000 by June. It has never been higher.