The deficit-funded tax cuts that National gave the high income earners is still being paid for by borrowing.

When National won office at the end of 2008, they had a mandate to give median income earners a tax cut 'north of $50 a week'. At the time John Key made that promise he explicitly pledged not to increase GST to pay for it.  

"National is not going to be raising GST," he fibbed. "What I am saying is if we do a half-decent job as a government at growing our economy I am confident that won't be happening."

Heh. "Half-decent."

Anyway, what happened next: National used the GST as cover for its 'tax switch', and the GST increase more or less wiped out the income tax cuts for median income earners. But top earners ended up miles ahead, at a time when the government was borrowing billions.

The Government said the GST 'tax switch' would be fiscally neutral. It cost around $1.5 billion in the first year alone. Now the government is having trouble meeting its number one economic target of getting the books back into order.

Yet the awkwardness of a continuing deficit coms at the same time when they are also claiming 'rock star' status for the economy, which is the new name for the top of the economic cycle ( as if a slow down from here were not as inevitable as a sunset following noon.)

This is the time in the cycle when tax revenues are maximised and spending on unemployment is at its lowest. If they can't get the books into surplus now, the deficit is going to be back in the multi-billions when growth slows. 

On the numbers the prime minister himself is using, government spending has declined as a proportion of GDP from 36% when he took office to 30% today. Spending isn't the problem (Even though I'm a critic of some of National's spending, such as handouts to Sky City casino and Team NZ, those are a matter of the wrong priority, and tiny components of the deficit anyway.)

The problem is revenue. 

The Government's income isn't paying the bills, not because its bills are too high but because its income is too low. 

Bill English has never run a surplus - in his term as finance minister before Michael Cullen was in office, nor in his two terms since. In between, Michael Cullen ran nine in a row. 

This wasn't just luck - Sir Michael would never have borrowed to cut tax on the highest incomes. National borrowed so much it can't make ends meet even when it is claiming the economy is going gangbusters.

Now the Reserve Bank has given National a way to cover its blushes, calling for a capital gains tax. 

They should introduce an income tax-capital gains tax 'switch' - a fiscally neutral tax cut on middle incomes paid for by offsetting tax on capital income. They have already borrowed to cut income taxes. Now they need to fill the fiscal hole they have dug.


Comments (10)

by barry on April 16, 2015

Plus, they are minus the income (dividends) from the 50% of the 3 power companies that they sold.

by Mikaere Curtis on April 16, 2015
Mikaere Curtis

Are there any official figures on how much a CGT is expected to raise ?  Over time I would expect capital to move from houses to actually productive forms of investment, which is the true benefit of a GGT.

by Wayne Mapp on April 17, 2015
Wayne Mapp

An interesting column. What is a sensible level of taxation in New Zealand?

Something that would work through thick and thin. And that accurately reflects our social/economic situation. After all we are not about to become Scandanavins.

Well, in my view the answer is definitely not CGT. It simply not the panacea for all tax problems. CGT is too variable and is highly dependent on economic cycles. And as we see in Australia, it appears to have virtually no impact on house prices. The problems in Sydney are the same as Auckland, even in a more difficult economy.

As Josie notes, govt expenditure has dropped from 36% of GDP to 30% since 2008, mostly due to reduced unemployment and a larger workforce, but also tight fiscal discipline by the government. But when these figures turn, as they will, you could easily anticipate govt spending getting back to 33%.

And maybe 33% is also about the right figure for govt revenue. It produces a surplus in good times and not too severe a deficit in bad times. It probably requires a top tax rate of 35%, cutting in around $100,000. No govt will want to increases taxes on those under say $80,000, so you can really only deal with the top rate. 

I suspect that 15% is about as high as you can go on GST, although some do make the case for 17.5%, with compensating tax cuts for the low and middle income earners. But this would be fundamentally a hard sell.

I guess one could re-introduce a land tax, applying to all non residential property, or alternatively to all revenue producing property thereby also catching residential landlords. Some might argue it would also be an effective brake on land inflation. Well, maybe, or maybe not.

This is a debate worth having. And it is not necessarily a Left/Right political tussle, though politics can never really be removed from a debate on the size of govt, which this really is. But it need not be one of these blind ideological wars where white is black and black is white, which all too often New Zealand political debate descends to.

by Katharine Moody on April 18, 2015
Katharine Moody

Interesting column from Fran O'Sullivan;

I get the impression that Key, his advisors and his Cabinet ministers know that the horse has bolted - much like Muldoon's government in their final years. There is no will to act - better to carry on with the status quo and leave it to a crisis to determine the future. As Fran points out - the lessons from 1984 are there - and hence the extraordinary public statements from the Reserve Bank ... but I think we're past the tipping point.

The government could perhaps provide NZers with a warning similar to "prepare for the worst" as just released by DairyNZ execs;

But of course, "the worst" includes an OBR triggering event - the very thing the Reserve Bank is alluding to if no action is taken.

 We are definitely between a rock and a hard place.

by william blake on April 18, 2015
william blake

They should introduce an income tax-capital gains tax 'switch' - a fiscally neutral tax cut on middle incomes paid for by offsetting tax on capital income. They have already borrowed to cut income taxes. Now they need to fill the fiscal hole they have dug.

 Josie can you unpack this a little further, would this approach help the poorest in our country? I would like a return to a progressive taxation system with some tax credit at the bottom. If we can run a deficit by giving the wealthiest a tax break why can't we do the same by giving the poorest a helping hand? We seem to have developed a culture where helping the poor is seen as gross stupidity but helping the rich is a hilarious jape.
by Josie Pagani on April 18, 2015
Josie Pagani

The problem with having a low wage economy (we might have parity with the Australian dollar but their wages are still three times higher than ours) is that a family can't live on a minimum wage. So everybody else has to subsidise those low wages with tax credits (Working for Families). I support doing that, but would rather we had a high wage economy, where the average wage can buy the average house. 

In other words, we don't have a tax problem in this country (except that we don't tax all income equally which is why we need a CGT). We have a wage problem.

In the meantime the squeezed middle are paying a higher percentage of their income on tax because they pay a higher share of it on GST and don't get the perks of some income being tax free (capital gain).

by Alan Johnstone on April 18, 2015
Alan Johnstone

three time higher ?

by Charlie on April 18, 2015

NZ: 55K pa

AU: 74K pa

According to google. 

So what is Aussie doing that we aren't?

It's not complicated: They have higher paid jobs over there because they have industries that need highly skilled people, chiefly in mining and downstream mineral processing. And the reason they have these industries is because they're broadly pro-development.

Australia is not 'The lucky country'. Aussies just play their hand of cards better than we do. Most importantly, they don't have an RMA which consistently undermines efforts to create those industries that require high capital investment and need skilled employees.

by Josie Pagani on April 18, 2015
Josie Pagani

Depending on the job - any job in resource extraction for example. A welder on an oil rig in Australia definitely gets x3 more money than a welder in NZ!

Whichever way you look at it - average wage higher in Australia than here. 

by Charlie on April 19, 2015

I suspect you'll find a similar welder on a similar oil rig offshore NZ gets paid a similar amount to the one in Aussie because there is a single international market for that field of work. Maybe a tad less here because of taxation and insurance differences. 

You've got to compare apples with apples.

The point I go back to: The real reason their wages are, on average, higher is because they have more welders working on more oil rigs (and mines & process plants) than us. This is because they get on with the business rather than shagging around with the RMA for years.


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