Ok, so the imbalance has something to do with tradable sector activity flatlining while non-tradable sector activity increased – meaning that we have more non-tradable activity as a % of total activity. There is a feeling this isn’t sustainable. In part this might be true, but to be honest we have also had a massive increase in our terms of trade – which implies we can sustain more non-tradable activity for each unit of traded activity.
However, I digress. If we accept that there is an imbalance, if only for the sake of argument, we can say that the higher exchange rate is a symptom of this imbalance. Given this, what will GST do?
Now, changing from income tax to GST is likely to bump up the domestic price level immediately. The increase in the domestic price level will then translate into a lower dollar – however, since this is because of a lift in domestic prices, is will not help competitiveness in any way. Namely the real exchange rate remains unchanged
However, correct me if I’m wrong, but there is one way that shifting to GST promotes exports and discourages importing. I believe that GST does not tax the “value-added” from exporting. This is effectively subsidising exports.
Furthermore, I think that firms do get GST rebates on imports – but if they don’t that implies that the change in the price level, which goes through the exchange rate, does act like a tax on imports. If this is the case it would discourage importing.
If anyone has any more details on the tax treatment of exports and imports I would like to hear about it – as this is the way that the tax shift could change structure, not through an adjustment in the exchange rate per see.