Tax reform: hot topic in New Zealand too. Shift to indirect taxing is part of sweeping economic overhaul

New Zealanders will wake up tomorrow morning to find that virtually everything costs 10 percent more. They will also need another 10 cents in the dollar for bus fares, to repair their cars, and for medical treatment. The reason is the new Goods and Services Tax (GST) which is being introduced October 1 as part of the biggest tax reform program in the country's history.

The government concedes that the tax will produce an immediate 5 percent rise in inflation, but says nobody will be worse off. Many people will actually be better off, it says, because simultaneous income-tax cuts of 20 to 25 percent will more than compensate. Pensioners and others on social security will also get offsetting increases.

But not everyone is convinced, despite a government advertising campaign to persuade people of the benefits of this switch to indirect taxation. In recent weeks, New Zealanders have been on a bumper shopping spree, buying new cars and furniture and stocking up on everything from groceries to clothing, to avoid the price hike.

The only exemptions to the new tax are financial services such as mortgage repayments, life-insurance premiums, rent, and privately sold, second-hand goods. Sales taxes of up to 20 percent are being abolished, and the government says some prices should actually fall.

GST is a key feature of the two-year-old Labour government's drive to revive the ailing economy and cut income-tax rates that are among the highest in the world: 21 percent of the average family income. The free-market policy, called ``Rogernomics'' after Finance Minister Roger Douglas, has seen sweeping deregulation and the abolition of protective measures and subsidies.

Many reforms, especially moves to privatize state enterprises, have been criticized by trade unions -- the Labour Party's traditional backers. Removal of protection has hiked unemployment to 5.3 percent. But Mr. Douglas says the program is working: inefficient industries are being restructured, inflation is down from 17 to 10 percent, and interest rates are falling.

The government says GST, by taxing spending rather than earnings, is fairer to working families who could not evade income tax the way the wealthy could. It rejected union calls to exempt food and clothing. The tax package guarantees families with one child a minimum income of NZ $250 (US $515) a week, with NZ $22 for each additional child. The average weekly wage is around NZ $370 (US $762). Labor unions currently negotiating wage increases have vowed to watch the effects of GST closely and demand increases next year if their members are disadvantaged. The success of the new tax package could well decide the future of the Labour government, which faces elections next year.