Tax Freedom Arrives Over The Next Few Weeks

Tax Freedom Arrives Over The Next Few Weeks

Tax Freedom Day in New Zealand represents the day in the year when the average New Zealander stops working for the government and starts working for themselves, according to the executive director of the New Zealand Business Roundtable, Roger Kerr.

"As far as central government is concerned, and given the revised basis on which the government accounts for its spending, today, April 23, is the earliest Tax Freedom Day", Mr Kerr said.

He said that the calculation of April 23 as Tax Freedom Day is based on central government core expenditure, which amounts to 31 percent of gross domestic product (GDP). Government spending is the best measure of the tax burden because almost all government spending ultimately has to be financed from present or deferred taxation (borrowing).

The government has introduced a new measure of spending, core Crown expenses, which excludes GST and the activities of state-owned enterprises and Crown agencies, in place of operating expenses. The latter measure has been used by the Business Roundtable to calculate Tax Freedom Day in the past. Had operating expenses continued to be used, Tax Freedom Day would fall on 29 April this year, two days earlier than last year (1 May).

The spending measure is a more accurate representation of Tax Freedom Day than calculations based on current taxation or income tax alone.

Indeed it understates the true tax burden because it leaves out or underestimates elements of government spending such as local government. If local government is included, total government spending in New Zealand, as measured by the OECD, is projected to be over 37 percent of GDP in 2003. On this basis, Tax Freedom Day would fall on 17 May.

This broader measure underscores the extent to which New Zealand is still a highly taxed country. Compared with New Zealand, Tax Freedom Day on this measure comes almost three weeks earlier in the United States (28 April), Australia and Ireland (29 April) and at a similar time for the OECD as a whole (19 May). A number of Asian and other countries have levels of government spending, and hence tax burdens, that are well below the OECD average.

The government lifted its long-term spending objective from under 30 percent to 35 percent of GDP in the 2000 Budget Policy Statement. In the 2003 Budget Policy Statement, the government stated that its surplus needs to be increased to achieve its high-level fiscal objectives. According to the government, this requires "core Crown expenses (plus the net payment/withdrawal to the NZS) [to average] around 35 percent of GDP over the horizon used to calculate NZS Fund contributions." The government's fiscal policy means that the tax burden, together with contributions to the New Zealand Superannuation Fund, will remain at its present high level for the foreseeable future.

"These calculations are of interest because of economic evidence that, beyond a certain point, government spending and taxation hamper economic growth. No country has achieved per capita growth rates of 4 percent or more a year on a sustained basis with general government spending approaching 40 percent or more of GDP. It follows as a matter of simple logic that this ratio must be reduced if the government is serious about its aim of restoring New Zealand to the top half of the OECD income rankings", Mr Kerr said.