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How GST affected retail sales in the 1980s

With goods and services tax (GST) set to rise from 12.5 percent to 15 percent on 1 October 2010, many people want to know how retail sales might be affected before and after the rise. In this article, we use quarterly (constant price) and monthly (current price) Retail Trade Survey figures to look back at how earlier changes to GST affected consumer spending patterns.

GST was introduced at 10 percent on 1 October 1986, adding 10 percent to prices. This increase was offset to some degree by the removal of sales taxes on some items.

GST then increased to 12.5 percent on 1 July 1989, pushing prices up another 2.27 percent. For example, if a good cost $110.00 before the increase, it cost $112.50 afterwards (all other things being equal).

The impending rise in GST from 12.5 percent to 15 percent means the prices of goods and services that are subject to GST may rise 2.22 percent. For example, a good that now costs $112.50, will cost $115.00 following the rise (all other things being equal).

GST is introduced – October 1986

Seasonally adjusted total retail sales increased by $508 million (or 22.9 percent) in September 1986 as consumers brought forward purchases in the month before GST was introduced. In October, sales fell by $752 million (or 27.6 percent), excluding GST. Figure 1 shows that sales stayed low in November, increasing by only $12 million (or 0.6 percent), before recovering in December (up $244 million or 12.3 percent) to levels last seen in August.

Figure 1

Graph, Seasonally adjusted total retail sales (excl GST), monthly at current prices 1985 to 1987.

Seasonally adjusted total retail sales volumes (obtained by expressing figures in constant prices, which are only available quarterly) increased 7.9 percent in the September 1986 quarter (up $593 million from $7,465 million to $8,058 million, in March 1990 quarter prices).

In the December 1986 quarter, sales volumes fell $991 million (or 12.3 percent). Figure 2 shows that sales volumes rebounded in the March 1987 quarter, increasing $436 million (or 6.2 percent) to June 1986 quarter levels.

Figure 2

Graph, Seasonally adjusted total sales volumes (excl GST), quarterly at March 1990 quarter prices.

Figure 3 shows that the furniture industry was significantly affected by the introduction of GST, with seasonally adjusted volumes increasing $69 million (or 25.1 percent) in the September 1986 quarter, then decreasing $146 million (or 42.4 percent) in the December quarter. In the March 1987 quarter, volumes returned to more normal levels, rising $45 million (or 22.8 percent). Other industries that were similarly affected included household appliances, hardware, and department stores.

The effect was most pronounced in industries that sold higher priced and more durable goods, as the potential dollar savings were larger and the goods were not perishable. However, the impact was only short-term, mainly affecting the quarter before GST was introduced and the two quarters that followed.

Figure 3

Graph, Seasonally adjusted sales volumes (excl GST), Quarterly at March 1990 quarter prices.

The least affected industries were generally those that sold non-durable goods, such as the food-related industries.

As figure 4 shows, supermarkets exhibited the largest effect out of the three food-related industries, with volumes rising 2.5 percent in the September 1986 quarter, falling 4.4 percent in the December quarter, and then rising 4.3 percent in the March 1987 quarter.

Figure 4

Graph, Seasonally adjusted sales volumes (excl GST), Quarterly at March 1990 quarter prices.

GST goes up – July 1989

On 1 July 1989, GST increased from 10 percent to 12.5 percent, which was a rise of similar magnitude to the one that will take effect in October 2010. Monthly retail sales figures show that consumers reacted to the 1989 GST increase, but not to the same extent as they did when GST was introduced. The decline in total sales lasted for only one month, not the two experienced in 1986.

In May and June 1989, seasonally adjusted retail sales excluding GST rose $67 million (or 2.8 percent) and $212 million (or 8.5 percent) before falling $422 million (or 15.6 percent) in July after the increase in GST took effect. Figure 5 shows that the dip was short-lived with sales up $122 million (or 5.4 percent) in August, then remaining steady in the following two months.

Figure 5

Graph, Seasonally adjusted total retail sales (excl GST), monthly at current prices 1988 to 1990.

Seasonally adjusted quarterly sales volumes were up 5.2 percent in the June 1989 quarter (up $385 million from $7,417 million to $7,802 million). Figure 6 shows that this increase was followed by a $619 million (or 7.9 percent) drop in the September 1989 quarter, and a $152 million (or 2.1 percent) increase in the December quarter.

Figure 6

Graph, Seasonally adjusted total retail sales (excl GST), Quarterly at March 1990 quarter prices, 1987 to 1991.  

As with the introduction of GST in 1986, industries selling higher priced and more durable goods experienced increased volumes in the quarter before the increase in GST, then lower volumes in the quarter after.

Again furniture retailing volumes were significantly affected, increasing $32 million (or 14.3 percent) in the June quarter, then decreasing $73 million (or 28.7 percent) in the September quarter before returning to more normal levels in the December quarter with a $41 million (or 22.4 percent) increase.

Figure 7 shows that vehicle retailing was also affected, with volumes rising $212 million (or 13.3 percent) in the June quarter, then falling $345 million (or 19.1 percent) in the September quarter, and then rising again by $117 million (or 8.0 percent) in the December quarter. The only other industry to show a double-digit percentage drop in volumes in the September quarter was household appliances, down $42 million (or 12.0 percent).

Figure 7

Graph, Seasonally adjusted sales volumes (excl GST), Quarterly percentage change, 1988 to 1990.

Figure 8 indicates that the increase in GST had no apparent impact on the food-related industries. Both the supermarket and ‘other food' industries showed falls in volumes in the quarter preceding and the two quarters following the increase in GST. Supermarket industry volumes were down 0.3 percent in the June quarter, 0.9 percent in the September quarter, and 1.1 percent in the December quarter, while other food fell 0.6 percent, 3.4 percent, and 1.6 percent respectively.

Figure 8

Graph, Seasonally adjusted sales volumes (excl GST), Quarterly at March 1990 quarter prices. 

Summing up – consumer spending before and after GST changes

Figures 9 and 10 show that consumers brought forward some retail purchases to beat price rises resulting from the introduction of GST in 1986 and the increase in GST in 1989. The extra sales in the lead-up to the introduction of GST in 1986 and increase in GST in 1989 were followed by short-term dips in sales immediately afterwards.

Figure 9

Graph, Seasonally adjusted total retail sales (excl GST), Monthly at current prices.

Figure 10

Graph, Seasonally adjusted total sales volumes (excl GST), Quarterly at March 1990 quarter prices, 1984 to 1991.

Consumers had more to gain from bringing sales forward when GST was introduced in 1986 than when it increased to 12.5 percent in 1989. The effect on sales volumes in 1986 was nearly twice as large as the effect in 1989.

Although the potential price savings in 1989 were relatively small (about 2.3 percent at a time when annual inflation was running at 3.5 percent), the impact on sales volumes (a 5.2 percent rise followed by a 7.9 percent fall and a 2.1 percent rise) was still significant.

In both 1986 and 1989, consumers brought forward purchases in industries selling big-ticket items, but there was little impact on volumes in the food-related industries.

The situation this year – with potential price savings of about 2.2 percent (before the increase in GST to 15 percent on 1 October 2010), and with annual inflation at relatively low levels – is quite similar to that prevailing in 1989 when GST increased to 12.5 percent, although in 1989 there was no offsetting decrease in personal income tax rates. The extent to which consumers bring forward purchases this year might once again be apparent in Retail Trade Survey figures.

Tables 1 and 2 show an industry breakdown of movements in monthly seasonally adjusted retail sales and quarterly seasonally adjusted retail sales volumes before and after GST was introduced in 1986 and rose in 1989.

Table 1

Seasonally adjusted retail sales (excluding GST)
Monthly at current prices
By industry
Industry Introduction of GST Increase in GST
1986 1989
Sep Oct Nov Dec Jun Jul Aug
Percentage change from the previous month
Butcher 6.9 1.6 -5.6 7.6 1.3 -2.6 7.7
Supermarket 14.8 -11.1 -1.1 9.7 2.0 -2.1 3.7
Other food 8.2 -6.9 -2.5 6.3 0.8 -3.0 3.0
Footwear 31.0 -26.2 -0.9 6.1 0.4 -16.2 7.5
Clothing and textiles 31.8 -28.5 -4.4 12.4 12.1 -10.9 -1.2
Furniture 60.5 -67.4 9.6 46.6 37.1 -47.2 19.5
Household appliances 32.7 -40.2 -0.4 16.3 34.3 -33.2 12.3
Hardware 40.6 -35.4 -6.3 12.5 9.0 -20.5 10.4
Department stores 30.4 -33.9 -2.3 14.9 14.1 -21.4 4.5
Chemists 4.0 -1.9 -6.4 6.9 2.3 -16.2 17.9
Liquor 34.3 -31.6 7.8 1.0 7.2 -15.5 7.1
Licensed hotels, clubs, taverns and other accommodation 4.8 -6.6 2.5 2.2 5.5 -2.6 6.9
Restaurants and takeaways 2.9 -0.2 -3.4 3.6 9.6 -4.2 -0.1
Total other repairs and petrol sales 9.5 -14.2 0.8 6.2 4.3 -10.0 2.7
Automotive (vehicle sales) 32.0 -41.8 7.0 21.8 10.4 -27.9 7.5
Other stores 30.1 -27.6 -6.3 8.6 3.5 -8.4 1.0
Total 22.9 -27.6 0.6 12.3 8.5 -15.6 5.4
Source: Statistics New Zealand
 

 Table 2

Seasonally adjusted sales volumes (excluding GST)
Quarterly at March 1990 quarter prices
By industry
Industry Introduction of GST Increase in GST
1986 1987 1989
Sep Dec Mar Jun Sep Dec
Percentage change from the previous quarter
Butcher -3.5 -5.3 -0.9 -5.3 -5.1 -4.0
Supermarket 2.5 -4.4 4.3 -0.3 -0.9 -1.1
Other food -0.6 -3.0 1.0 -0.6 -3.4 -1.6
Footwear 2.5 -10.6 6.8 0.6 -8.8 5.3
Clothing and textiles 11.5 -13.4 6.6 16.4 -5.3 -1.6
Furniture 25.1 -42.4 22.8 14.3 -28.7 22.4
Household appliances 15.0 -17.8 13.5 9.0 -12.0 9.1
Hardware 18.0 -20.2 5.1 5.6 -9.7 0.4
Department stores 10.2 -15.6 7.3 0.8 -4.9 1.9
Chemists 1.4 -0.1 4.5 1.7 -7.6 -0.8
Liquor 8.7 -9.4 8.4 3.8 -7.5 4.8
Licensed hotels, clubs, taverns and other accommodation 1.1 -2.4 0.6 -0.2 2.9 -3.4
Restaurants and takeaways -1.2 -3.0 -1.1 0.8 0.5 -3.4
Total other repairs and petrol sales 4.3 -6.0 4.9 5.6 -3.6 4.3
Automotive (vehicle sales) 15.0 -20.4 12.0 13.3 -19.1 8.0
Other stores 12.5 -14.3 2.4 0.8 -4.5 -4.7
Total 7.9 -12.3 6.2 5.2 -7.9 2.1
Source: Statistics New Zealand
Background information
  • GST was introduced on 1 October 1986, at a rate of 10 percent. It replaced existing sales taxes for some goods and services.
  • GST increased to 12.5 percent on 1 July 1989.
  • Retail Trade Survey figures do not include GST.
  • Quarterly Retail Trade Survey sales figures are available in current-price and constant-price form. The current price figures reflect sales at prices prevailing when sales were made. The constant-price figures remove the effect of price change, showing volume change. The constant-price figures are referred to above as 'sales volumes'.
  • Monthly Retail Trade Survey sales figures are available only in current prices.
  • The figures presented here are seasonally adjusted and remove the effect of normal seasonal change in sales and sales volumes.
  • Consumer prices increased 3.3 percent in the September 1986 quarter, followed by an 8.9 percent increase in the December 1986 quarter, the quarter in which GST was introduced. Annually, consumer prices increased 11.0 percent in the year to the September 1986 quarter and 18.2 percent in the year to the December 1986 quarter.
  • Consumer prices increased 1.2 percent in the June 1989 quarter, and 3.5 percent in the September 1989 quarter, the quarter in which GST increased. Annually, consumer prices increased 4.4 percent in the year to the June 1989 quarter and 7.2 percent in the year to the September 1989 quarter.
Excel tables

See the ‘available files’ section of this article for a full industry breakdown of monthly seasonally adjusted retail sales (from October 1985 until July 1990) and quarterly seasonally adjusted retail sales volumes (from the December 1984 quarter until the September 1991 quarter).

Back to Price Index News: July 2010

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