Budget Reveals Weak Growth Outlook, Low Tax Cuts

Budget Reveals Weak Growth Outlook and Tax Cuts that Fall Short of Fiscal Drag

“The absence of any mention in the 2008 budget of the government’s former “top priority” goal of raising New Zealanders’ incomes to the top half of the OECD range suggests that it has thrown in the towel”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“Despite high ongoing terms of trade, the budget numbers confirm that the outlook for growth in business investment, productivity and per capita incomes remains weak, and that the income gap with Australia will widen further.

“The budget rightly says that “New Zealand needs to significantly lift productivity in order to build a high value, high wage economy to better compete globally”, but it is not projecting any long-term increase in trend productivity growth.”

Mr Kerr said that the government spending (core Crown expenses) share of the economy is forecast to rise rather than fall (by around 1.5 percent of GDP between 2008 and 2010), indicating that the true ongoing tax burden is rising rather than falling.

“Moreover, it is doubtful whether the personal tax cuts announced even offset fiscal drag during the government’s term of office – the increase in revenue as taxpayers move into higher tax brackets. If not, we are seeing a Clayton’s tax cut: workers on average wages will only be given back part of these hidden tax increases; they will not benefit from real tax reductions.

Mr Kerr said the government had missed a major opportunity to use tax policy to improve productivity and economic growth. Its own Tax Review in 2001 (the McLeod Review) recommended the adoption of a lower and flatter tax structure to promote these goals.

Likewise earlier this year the Business Roundtable, the New Zealand Chambers of Commerce, Federated Farmers and the New Zealand Institute of Chartered Accountants called for all high income tax rates to be reduced and aligned with the company tax rate at 30 percent as a step in this direction. Such a move, which has been advocated by revenue minister Peter Dunne, would also greatly simplify the tax system.

Instead the government had widened rather than flattened the tax scale with the reduction in the bottom rate, and the threshold adjustments did little to improve incentives for productive activity. The focus instead was on short-term relief to household budgets.

Moreover, with greater spending discipline and growth-oriented tax changes, much larger tax reductions could have been implemented without putting at risk inflation and a sound fiscal position.

“The government deserves credit for recent initiatives, such as the lower company tax rate applying from April this year and the conclusion of a sound free trade agreement with China”, Mr Kerr said.

“Regrettably, however, far too many of its policies have been inconsistent with its growth objectives, which stand no chance of being achieved.

“The economy, and credible policies to improve its performance, must be front and centre in the forthcoming election debate if New Zealand is to have a better future.”

ENDS

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