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GST to slam brakes on economy

The GST will increase the 90-day bank bill rate, the unemployment rate and the trade weighted index.

At the same time gross domestic product growth will be lower than it would be in the absence of the GST.

These are the findings of research undertaken jointly by the Curtin University’s Institute for Research into International Competitiveness and the Melbourne Institute of Applied Economic and Social Research.

The results were outlined in the WA Quarterly Bulletin of Economic Trends.

When considering the GST effect on the Consumer Price Index in isolation, the researchers assumed inflation would be 3.3 per higher in the September quarter 2000 than in the absence of the GST.

The study considered the expected

reaction to an inflation increase by the Reserve Bank through increases in interest rates – assuming the RBA does not ignore the temporary price hike.

Next, the researchers considered the effects of the GST on consumption levels caused by tax breaks.

They assumed a once-off increase in the level of household consumption by 0.8 per cent of forecast GDP in the September

quarter 2000. The results were than collated to give a net or combined effect.

“The tighter monetary policy induced by the CPI effect had a dramatic impact on the predicted path of the unemployment rate, as it rose from 6.7 to 7.1 per cent over the course of the September quarter 2000.”

On the other hand, the increase in consumption brought about by the GST package could help drive unemployment levels below that Australia would experience if GST-free, the bulletin said.

The consumption increase will not offset the CPI effect and the induced monetary tightening, resulting in an expected unemployment rate of 6.9 per cent instead of 6.6 per cent (GST-free) during the December 2000 quarter, the study found.

The same opposing forces of an increase in the CPI and of consumption would also drive the GDP growth rate lower than would be the case in the absence of the GST.

Business investment driven by the same forces would most likely remain unchanged, it said.

“Taken together, the evidence from these experiments suggests an interesting tension between the Reserve Bank and Treasury over the coming six months or so,” the bulletin said.

“It seems very unlikely that the RBA would be comfortable allowing inflation to remain far above its target band for a sustained period, as this would increase the likelihood of inflationary expectations (and wage demands) rising accordingly.” it said.

“On the other hand, the sharp and sustained rise in the unemployment rate implied by the CPI effects would certainly make Treasury equally uncomfortable.”

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