was Tax Freedom Day. As far as the central government tax
burden is concerned, Saturday was the notional day of the year
when the average New Zealander stopped working for the
government and started working for themselves.
year we effectively spent 118 days working for central
government. That’s a third of the year.
calculation of 28 April uses the forecast of core government
expenditure of 32.3 percent of gross domestic product (GDP)
found in the Pre-election Economic and Fiscal Update. This may
change of course, once the new forecasts are published in the
spending is regarded as the best measure of our overall tax
burden, since almost all government spending is ultimately
financed from present or deferred taxation (borrowing) in one
form or another. In
addition, this measure is not distorted by whether the budget
is in deficit or surplus.
year’s Tax Freedom Day is 11 days earlier than in 2010 and
2011, when it fell on 9 May according to revised data. This
earlier date reflects the progress that National is making in
constraining the growth of core government spending.
and 2004, Tax Freedom Day fell 12 days earlier on April 16.
This was at a time when the Labour Government had kept core
government spending to 29 percent of GDP. It was before the
onset of their destructive third term spending spree.
might recall that in 2010, the government’s 2025 Taskforce,
an advisory body that was set up to propose ways of improving
our economic performance, recommended that if core government
spending was reduced back to this 2004 level of 29 percent of
GDP, then the top rates of tax – personal, company and trust
- could all be dropped to 20 percent, with all of the lower
tax rates including GST (at 12.5 percent as it was back then)
left exactly as they were. That would have meant that everyone
earning more than $14,000 a year would have paid less income
tax, and nobody would have paid more.
imagine the electrifying boost to our economy that a top tax
rate of 20 percent would deliver. It would not only provide
the jobs and growth the country so desperately needs, but it
would also become a magnet for Kiwis living abroad to come
back home. In addition it would draw to New Zealand those
international businesses that are constantly on the look out
for opportunities and competitive advantage.
the earlier Tax Freedom Day falls, the lower the country’s
tax burden and the more opportunities taxpayers have to build
a better life for themselves and their families. While the
present trend is finally moving in the right direction,
government forecasts show there will be only modest
improvements in Tax Freedom Day through to 2015 when it is
projected to occur 6 days earlier on 22 April. This is largely
due to the fact that National has opted to retain many of
Labour’s popular big-spending programmes like interest free
student loans and Working for Families. They argue that now is
not the right time to cut such programmes as they are
providing essential financial support to families during
difficult economic times.
is bad enough that New Zealanders are forced to spend a third
of the year working for the government to fund its core
spending, sadly, this is not the whole story.
government spending is only a part of the whole cost of
government, since it not only disregards some Crown outlays,
such as the spending on State Owned Enterprises and hundreds
of Crown Entities, but it also omits some areas of significant
expenditure such as the cost of local government.
The OECD includes all of these in a broader measure of
total general government spending. On that measure, New
Zealand’s total general government spending is forecast to
be 43.5 percent of GDP in 2012.
On this basis, Tax Freedom Day will fall on 8 June.
This is 22 days earlier than 2011 when it fell on 30 June. But
since the earthquake had such a major impact last year, it is
best to look at 2009 when it fell on June 6 and 2010, when it
fell on June 7. This shows that the trend has been in the
broader measure of the tax burden also enables us to compare
ourselves with other western countries. Doing so highlights
the extent to which we are a relatively high-taxed country.
Compared with New Zealand, Tax Freedom Day on the broader
measure comes over six weeks earlier in Korea (23 April), more
than a month earlier in Australia (3 May) and Switzerland (5
May), and about two to three weeks earlier in Turkey (12 May),
the Slovak Republic (18 May) and Estonia (23 May).
Tax Freedom Day will occur in a further six OECD
countries, including the United States (30 May) and Japan (3
June), before it arrives in New Zealand.
OECD as a whole, Tax Freedom Day falls on 7 June, a day
earlier than in New Zealand.
fast-growing Asian and other nations that have levels of
government spending and tax burdens well below the OECD
average, have a significant competitive advantage over New
Zealand. This is a serious risk that Treasury identified in
their briefing paper to the in-coming government, when they
warned, “the increasing mobility of global capital and New
Zealand workers - together with the downward trend in
international company tax rates - continues to apply pressure
to the competitiveness of New Zealand’s personal and company
tax rates.” They recommend on-going reductions in government
spending along with further tax cuts to improve incentives to
work, save and invest.
looking at the heavy tax burden we presently face it is
important to remember that it has not always been this way. I
invited this week’s NZCPR Guest Commentator, economic policy
analyst Dr Bryce Wilkinson, the director of the economic
consultancy Capital Economics and a former Treasury principal,
to provide an analysis of New Zealand’s tax burden over the
years. In his paper Why
taxes are so high, Bryce explains:
the last hundred years, central government taxes per capita
rose 20 times faster than consumer prices - from around $660
in 1910 to $13,198 in 2010 in year ended March 2011 dollars.
Meanwhile real GDP per capita only rose roughly 4-fold.
The fact that taxes rose roughly 5 times faster than
incomes is reflected in the rise in taxes from 6.3 percent of
GDP in 1910 to around 30.8 percent in 2010.”
puts the changes into an historical perspective: “Real taxes
per capita almost doubled during the decades in which World
Wars I and II occurred. They
more than doubled again in the decade of the 1930s - which
encompassed the Great Depression.
Increases in taxes per capita more or less matched the
increase in GDP per capita between 1950 and 1970, with the tax
revenue ratio being of the order of 24-25 percent of GDP.
The next 20 years saw another big lift in real taxes
per capita, both absolutely and relative to GDP.
High rates of inflation drove taxpayers up the
progressive tax rate scales during this period.
The decade of the 1990s provided some respite in that
it was the first since the 1920s on this dataset in which
taxes per capita did not rise between the beginning and end
points. The last
decade has seen another big increase.” To read Bryce’s
informative commentary, click here
changing rates of taxation and government spending reflect the
enormous shift in the role of government that has taken place
in New Zealand since the early 1900s. Originally limited in
its core government function of providing basic public goods
such as law and order, defence, education, pensions, along
with infrastructure – road, rail, public buildings, and
communications – the expanding state with its welfare focus
has become an easy touch for generations of interest groups
advocating for special privileges and funding. It’s also
fair to say politicians themselves have eagerly taken on the
elevated role, finding public favour by being profligate
rather than frugal.
Bryce’s article points out, New Zealand’s economic history
has become a battle-ground for this on-going struggle.
year the Economist produced a special report on the role and
size of the state, concluding that big governments get in the
way of their nation’s social and economic progress. They
cited the experience of Singapore as one that Western nations
explained that Singapore now provides better schools and
hospitals and safer streets than most Western countries—and
all with a state that consumes only 19 percent of GDP.
Singapore has opened it arms to global enterprise, building an
environment that is attractive to business with excellent
infrastructure, a well-educated workforce, open trade routes,
the rule of law, a flexible labour market, and low taxes - a
top income tax rate of 20 percent and a corporate rate of 17
percent. In fact, Singapore’s main competitive advantage is
good, cheap government.
main savings comes from the way they provide and fund social
services. Their high performing education system only costs
3.3 percent of GDP – less than half of what New Zealand
spends on education. In addition, teaching is a highly sought
after profession with good rewards for good teachers.
welfare safety net to cover the very poor and the very sick
does exist, but in general, people are expected to draw on
their own personal and family resources to look after
themselves. The country’s leaders have a fundamental dislike
of the sort of free universal welfare benefits that have
become unaffordable and entrenched in most Western nations.
course, Singapore has the Central Provident Fund, which
requires every worker to pay a fifth of their salary into
their CPF account, with their employer
contributing another 15.5 percent. That provides Singaporeans
with the capital to pay for their own housing, pensions and
health care, and their children’s tertiary education.
global economic crisis and the difficult times being faced by
countries around the world is an opportune time to reflect on
how best to deliver a brighter future for a nation. Our
present government is committed to lower government spending
and a fundamental realignment of the welfare system. But
ultimately, that will not be enough. Reducing taxes to a top
rate of 20 percent – along the lines suggested by the 2025
Taskforce - to match Singapore, Hong Kong, and many other high
performing nations, would provide the step change that this
country so desperately needs. The question is does any
political party have the vision and courage to move us in that
1. Economist, Go
east, young bureaucrat
This week’s poll asks: Would
lower tax rates improve our economic performance?
Click here for poll >>>
Skip to top Skip
to this weeks poll
Send to friend
comments will be posted on the
NZCPR Forum page click
to view >>>
Skip to top Skip
to this weeks poll
to a friend: