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Dr Muriel Newman

A Missed Opportunity

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20 May 2007

A Missed Opportunity

People are getting sick and tired of this government telling us how to run our lives – what we can and can’t eat, how to raise our kids, and now, to add insult to injury, the key message in the budget is that they know far better than you or I how to spend our own money.

Like you, I earn taxes for this government through long hours of hard work. But our taxes in this country are now so big that it takes the average Kiwi until April 30th – Tax Freedom Day – to stop working for the government and start working for him or herself.

The problem that we all face is that Labour has turned New Zealand into a very high taxed country. When they became the government in 1999, we collectively paid $32 billion in tax. That is the equivalent of around $7,000 for every man, woman and child. The breakdown of that $32 billion shows that we paid $15 billion in individual taxes, $4b in company tax, $8b in GST, and, along with other stealth taxes, $1.4b in petrol tax, road user charges and motor vehicle licences. (See Budget Economic and Fiscal Update 2000 )

This year’s budget shows that the tax-take has risen a whopping $20 billion since that time to $52 billion. That is $13,000 for every man, woman and child. This comprises a massive $25b in personal tax, $9b in corporate tax, $11b in GST and $1.9b in taxes from motorists. (See Budget Economic and Fiscal Update 2007 )

Further, while Labour signalled that only 5% of us would ever have to pay the top rate of tax, when they introduced the 39 cent rate for income over $60,000, well over 12% of taxpayers are now hit by the top rate. In comparison, Australians do not have to pay their top rate of tax until they earn $180,000 or over. The relief from this ‘bracket creep’ through the lifting of thresholds – promised in last year’s budget – has now been scrapped.

According to the latest OECD figures, New Zealand’s total tax burden now stands at 36.6% of our economy – up from 24.7% in 1965. In comparison, Australia’s is far lower at 31.5%. (See OECD Tax Burden )

The Australian government has worked on the premise that it makes good economic sense to return some of their tax surplus back to the families that earned it. They realise that this will stimulate growth in the economy as well as rewarding effort and creating a stronger incentive for hard work. Five years of tax cuts have contributed to a significant widening of the income gap between our two countries with the per capita income in Australia of $47,181 being 70% ahead of ours at $33,682. It is little wonder that some 700 New Zealanders a week are now moving across the Tasman. (See The great trans-Tasman tax debate )

Governments force us to pay our taxes under threat of fines and imprisonment. The problem is that when we pay record amounts of tax we know that much of the money is wasted. Not only does the deadweight cost of taxation render government spending far more inefficient than private sector spending, but many of the funding decisions are of dubious quality being based on winning voter support rather than good public policy. Heavily taxing high income families then returning money to them as welfare payments through the Working for Families scheme is a case in point. Having a lower tax rates for Maori enterprises is almost impossible to justify. And how on earth does the taxpayer benefit from a massive expansion in public service jobs which now number 40,113 up from 29,055 in 2000? (See Human Resource Capability Survey 2006 )

In fact, Treasury has been so concerned about the growth of poor quality spending, including programmes that duplicate existing ones or simply fail to deliver, that it issued the following warning to Ministers:

“There is little information to indicate that NewZealanders are getting more services and better results from the public sector for the large increase in resources provided. What little information exists is not encouraging. Ministers and the public are frequently surprised by poor performance. One of the few output measures is the volume of hospital patient discharges. In the three years up to 2003/04 these rose by about 5%, compared with a 21% growth in hospital spending. It is difficult to tell what improvements in health outcomes or services have been achieved for the additional expenditure on health, and whether NewZealanders are getting value for money.” (See Briefing to Incoming Government 2005 )

In Budget 2007, the government had a clear choice. They could have used the surplus for tax cuts or they could keep the money to use themselves. Roger Kerr, the Executive Director of the Business Roundtable and the NZCPR Guest Commentator this week, in an article entitled “It’s Not Your Money, Dr Cullen”, puts it this way:

“Dr Cullen has conned too many people into believing there is no right time to cut tax: it only stokes the inflationary fires and pushes up interest rates. Or at best taxes can only be cut if the economy is flat on its back, and can do with some life-preserving ‘stimulus’. This is absurd. The Howard government In Australia has cut taxes five years in succession without igniting inflation. Here the government has raised tax burdens enormously, and reignited inflationary pressures”. (To read the full article click )

It is government spending that is the key driver of inflation. If the government reigned in its spending, tax cuts are not inflationary.

The recommendation to the government to cut taxes and reduce spending have come from all quarters from Treasury, to the OECD, and now to the International Monetary Fund, which in its latest report recommended “shifting the mix of fiscal measures toward greater tax reductions and smaller expenditure increases”. (See IMF Report May 2007 )

But rather than taking that advice, Dr Cullen has chosen to increase spending and force another stealth tax onto New Zealand, this time in the form of a payroll tax for businesses. That is not to say that a compulsory savings scheme does not have merit; but the underhand way in which the Kiwi Saver scheme it is being imposed on the country without a full and open debate, has no merit at all.

The KiwiSaver scheme with its compulsory employer contribution, coming hard on the heals of other employment cost increases such as the rise in the minimum wage and the imposition of four weeks holiday a year, is likely to force even more businesses to move offshore. And while the much-heralded reduction of company tax to 30% will help many in business it will do nothing for the hundreds of thousands of small businesses that operate outside of a company structure. All they will gain from this budget is a payroll tax and additional compliance costs.

As we reflect on this budget of missed opportunity, readers of this column have brought to my attention a survey published by the Business Council for Sustainable Development which has given the thumbs up for the budget from their research panel of over 600. They reported that 60% were in favour of employers having to match employee KiwiSaver contributions of up to 4%; and in answer to the question: “if personal tax cuts were to increase interest rates would you prefer a tax cut this year, prefer a tax cut introduced over time, prefer no tax cut or don’t know”, 32% of their panel wanted a tax cut this year, 38% wanted one over time, 25% preferred no tax cut and 5% didn’t know (Public verdict firms on Budget measures ).

If you would like an opportunity to express your view on important policy issues, please register for the NZCPR Research Panel. While many readers have already joined the panel we do not yet have enough volunteers to give us the critical mass required. To join the panel, please click here .

Here is the final word from Roger Kerr:

“The bottom line in the budget is that the combination of excessive government spending, taxation and regulation is dragging down the economy’s growth rate. Far from GDP growth accelerating to Dr Cullen’s target of 4 percent a year or more, necessary to haul New Zealand back up the OECD income ladder, the medium-term outlook is for an average growth rate of just 2.5 percent. Dr Cullen’s legacy is likely to be that of a failed finance minister who inherited the highly successful reforms of the 1980s and early 1990s and largely squandered the gains.”

The poll this week asks: Do you believe the budget should have included personal tax cuts? Take part in poll

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