Initially adding 10% to the cost of most goods and services, GST was a key part of the economic reforms of the fourth Labour government that were dubbed ‘Rogernomics’.
Minister of Finance Roger Douglas had the opportunity to implement his ‘new right’ reforms after Labour won a landslide victory in the snap election of July 1984. The new government inherited an alarmingly high budget deficit and overseas debt, an over-valued dollar, and rocketing inflation. The economy was in crisis, and Rogernomics was a ready-made solution – or so it seemed to many.
It was the era of Ronald Reagan and Margaret Thatcher, and ‘new right’ policies were in vogue worldwide. But nowhere else were they implemented with the speed and zeal shown by Douglas and his supporters. New Zealand was quickly reinvented as one of the most free-market economies in the industrialised world. The agenda came thick and fast: deregulation, privatisation, the sale of state assets, and the removal of subsidies, tariffs, tax breaks and price controls.
GST was added to the mix in 1986. This was a ‘regressive’ tax – one that hits the poorest the hardest – because people on low incomes spend a higher proportion of their money on basic goods and services than do the better-off.
The reforms came as a surprise to both the electorate and the media. A long period of low or negative economic growth increased public concern, as tens of thousands of people lost their jobs. Worried that things had gone too far, Prime Minister David Lange put the brakes on a few months after Labour was re-elected in 1987, calling for a ‘pause and a cup of tea’. Lange forced Roger Douglas to resign from Cabinet in 1988. When Douglas was voted back in by the Labour caucus the following year, Lange resigned as prime minister.
The rate of GST was increased to 12.5% in 1989 and remained at that level until 2010, when it was raised to 15%. Today most economists view the reforms as a necessary step towards a stronger economy, but quite a few voters of mature years still hanker for the ‘good old days’ of greater government control of the economy.
Image: Roger Douglas on the steps of Parliament (Alexander Turnbull Library)