Inland Revenue’s long-term insight briefing says there are ‘many reasons’ to consider lifting GST to 18% to pay for an ageing population

It is a truth universally acknowledged, that a government in possession of a structural deficit and an ageing population, must be in want of a new tax.

Whatever the government’s own views, the idea is so firmly lodged in the minds of policy advisors that some form of levy may already be considered the rightful property of the Crown.

Prime Minister Christopher Luxon says he is not interested in raising taxes, but officials at Inland Revenue appear to be laying the groundwork for a possible GST hike anyway.

Late last month, IRD published its draft long-term insights briefing. These are prepared independently every three years to guide debate about future policy. They do not reflect government positions or offer direct advice on settings.

The 2025 briefing focused on ensuring the tax system “can adapt to changing revenue needs over time”, but it was effectively an assessment of how extra revenue could be raised.

It is highly likely taxes will need to rise. IRD notes that fiscal pressures could be eased by cutting expenditure, but that is unlikely to be sufficient on its own.

Treasury’s 2021 long-term fiscal statement estimated New Zealand’s ageing population would push superannuation costs from 4.2% of GDP to 6.4% by 2061, and health spending from 6.9% to 10.6%.

An annual deficit equal to 13.3% of GDP is projected to open up over the next 35 years unless taxes rise or access to public healthcare and pensions is restricted.

This is not unique to New Zealand. Most developed countries are being forced to raise taxes to meet growing fiscal pressures. These estimates also exclude rising defence spending and climate transition costs.

Treasury is preparing an updated long-term fiscal statement due later this year, but the outlook is expected to remain unchanged: current policy settings are unsustainable.

Inland Revenue appears to be using this insights paper to prepare the ground for an inevitable debate about how to raise taxes efficiently and fairly.

Keep it simple, stupid

The department’s central conclusion is that if taxes must rise, it is better to lift existing income and consumption tax rates than to introduce new tax bases.

“In Inland Revenue’s view, the ability to adjust rates on main bases will be a more flexible adjustment mechanism than adding new tax bases when revenue needs change. This is because adding new bases takes time, imposes significant transition and administration costs and provides for a significant amount of new revenue at one point of time rather than providing a gradual transition,” the draft briefing said.

“This analysis shows there are difficult trade-offs involved in all alternative bases. This underscores the importance of the main bases of income tax and consumption tax being designed in a way that is as efficient and fair as possible while having the flexibility to adjust to changing revenue needs.”

While the department supports broadening some taxes—such as on capital gains—it argues those reforms should not be used to raise revenue.

Lessons for Labour 

The briefing paper should be required reading for opposition parties promising to reverse many of the Coalition’s spending cuts. They will need tax increases to balance the budget.

Labour has pledged to reform taxes on capital if it wins the next election, potentially through a broader capital gains tax or a wealth tax.

While some earlier Labour proposals framed these as part of a revenue-neutral tax switch, the current caucus knows it will need to use the proceeds to fund its policies.

Broadening capital gains tax, excluding the family home, has been estimated to raise around 1.2% of GDP annually, though it would take a decade to build up to that amount.

Or a 2% wealth tax on assets over $5 million would raise a similar amount each year and could take effect immediately. The rates and thresholds, of course, could be adjusted up or down.

Tax experts at Inland Revenue are wary of both options. A wealth tax would create distortions and be difficult to collect, while a capital gains tax would be volatile and unreliable.

IRD’s briefing noted that most countries that introduced wealth taxes have since repealed them. In 1990, 12 OECD countries had a wealth tax — only three do today, and just one raises more than 0.5% of GDP from it.

Wealth taxes would require real-time asset valuations, creating high administrative and compliance costs. There would also be liquidity issues when asset-holders lacked cash to pay, and the wealthiest could shift assets offshore.

Broader or higher income taxes, they argue, would be a better option.

The paper is broadly supportive of expanding the capital gains tax regime—which currently applies only to certain assets and scenarios—but mainly to improve fairness and economic efficiency.

“Revenue from capital gains could therefore make a meaningful contribution to addressing long-term fiscal challenges. However, as noted in the Overview, the last Treasury LTFS projected an operating deficit of 13.3% of GDP by 2061 under current settings. Therefore, even with more comprehensive taxation of capital gains other tax or expenditure measures would be needed in the longer term,” it said.

“While a CGT would reduce opportunities for income sheltering and reduce distortions in the allocation of savings, capital gains taxes create costs through lock-in and provide a penalty on risk-taking. Capital gains taxes can also have relatively high compliance costs.”

What to do instead?

While Inland Revenue doesn’t say so directly, the paper implies that future governments should simply raise income and consumption tax rates if more revenue is needed.

Increasing income taxes would be relatively straightforward, though politically difficult. IRD suggested minor policy changes to trusts, capital income, and company structures to improve fairness and help make higher rates more workable.

But the briefing paper gives more attention to the option of raising GST from 15% to 18%. That would have generated about $5.5 billion in the 2023 fiscal year — a significant step toward filling the fiscal hole.

The catch is that it would push some low-income households into poverty and make the tax system less progressive. To offset this, IRD modelled a GST tax credit to fully compensate families earning less than 60% of the median disposable income.

“This threshold would provide the credit to 26% of families in the population. On average a family in this target population would bear an additional amount of $650 in GST per annum due to the GST rate increase. We estimate a credit targeted at this group of families, that fully compensates them for their GST increase, would cost around $0.44 billion – or 8% of the gross revenue gain. The net revenue gain would therefore be around $5.1 billion,” it said.

Because some benefits and superannuation are indexed to inflation and average wages, the one-off spike in prices would also lift those payments by about $570 million, further reducing the net revenue gain.

IRD noted several reasons to consider “using GST to meet increased revenue needs”, including its efficiency, ease of measurement, and lack of a penalty for risk-taking.

These may be sound arguments, but it seems unlikely any political party would pursue them while the cost of living remains voters’ top concern.