Post-Budget Address to Johnsonville Rotary Club
Peter Dunne, Minister of Revenue
Johnsonville Community Centre
6pm, Monday 14 June 2010

Good evening. It is a real pleasure to be here with you tonight.

I have spent a great deal of time travelling far and wide around New Zealand since the Budget was handed down on May 20, talking about it, its impact and the likely directions for our country over the next few years.

So tonight is very much coming home and having the chance to talk to you; to have that discussion with you.

It is in that context and that spirit, that I am very comfortable being here to talk to you about Budget 2010 and what it holds and what it means for communities like this one, and New Zealand as a whole.

It would be fair to say that the tax measures in Budget 2010 make a bold statement about tax policy change in this country.

In many senses, they are the culmination of a series of major changes over the last 5 years.

While there have been different Governments in power over those years, the fundamental objectives of the various tax changes in that time have largely been the same – to boost savings, investment and productivity; to ensure our tax system is internationally competitive; and to keep our tax system as simple as possible, by removing distortions within it.

Although tax is not a silver bullet in terms of ensuring our future prosperity, in the wider context, taxes do have an impact on decisions like whether to stay, and work in New Zealand.

For a small, isolated trading nation like ours, with its highly mobile and skilled labour force, high level of debt, and severe fiscal constraints, that can in turn have an influence on economic growth.

Although our population has risen substantially in recent years we still have nearly one in five - just over 17% - of New Zealanders with skills living and working overseas.

Amongst OECD countries, only Ireland and Luxembourg have bigger proportions of their skilled labour force resident offshore, and much of that will be spread through their European Union neighbours.

Given our comparative isolation, having such a high proportion of our skilled workforce living elsewhere is far more problematic, as it is that much more difficult to entice them to return.

In this regard, the Government’s challenges are many and varied.

Not only are we seeking to retain a skills base in New Zealand, but we also are committed to boosting domestic productivity, encouraging higher levels of savings and investment, and reducing indebtedness.

KiwiSaver’s extraordinary success has already demonstrated that creating the right incentives to encourage New Zealanders to save and invest are positive signals people respond to – and Budget 2010’s tax changes are a further important step in that regard.

It is worth recalling just how far tax policy has changed in the last five years.

When I became Minister of Revenue in late 2005 the top personal tax rate was 39 cents in the dollar; the bottom rate was 15 cents on incomes below $9,500.

Companies, trusts, and most savings vehicles were taxed at 33 cents in the dollar, and the maximum rebate anyone could claim on charitable donations was $633.

This October, just 5 years later, the top personal tax rate will have been slashed by more than 15% to 33 cents – the same as the trust rate, meaning there will be no longer any reason for the dramatic explosion in the number of trusts being set up by people to shelter income to minimise their tax liability.

That explosion – which is estimated to cost the Government around $300 million a year in tax revenue foregone – was a direct consequence of Labour’s first decision after coming to office in 1999 to hike the top tax rate to 39 cents.

That was pure envy politics at its worst, which became the root cause of a number of the tax planning distortions we saw the through the following decade, which this year’s package is seeking to tidy up.

Of concern, though, have to be recent comments from Labour that the current top tax rate of 38 cents is fair and reasonable, and that for so-called equity (read envy) reasons a future Labour Government would hike the top tax rate.

All that will do is set off the aggressive tax planning and avoidance mechanisms that have so distorted our tax system over the last decade, all over again.

By October this year the bottom tax rate will have fallen nearly 50% in the last five years to 10.5 cents – the biggest percentage fall of any rates, and therefore somewhat at variance with Labour’s claims about who has benefited most from tax cuts – and the threshold up to which it applies will have gone up considerably, from $9,500 to $14,000.

All intermediate tax rates will also have been reduced, and every income threshold increased, so much so that for nearly three quarters of taxpayers, their top marginal rate will now be just 17.5%.

When the effect of Working for Families tax credits is added in, a family with two children, will now pay effectively no tax at all, until their earnings exceed $50,000.

From April next year, the company tax rate and that applying to certain savings vehicles will drop to just 28 cents.

Aligning the company tax rate and the rate for savings vehicles, such as PIEs, sends a powerful signal about the desirability of promoting greater savings and investment levels.

While I am delighted that it has been possible to align the top personal and the trust rates at 33 cents, I have to acknowledge that, from a UnitedFuture perspective, aligning the corporate rate as well has long been the ultimate objective.

That still remains a medium term goal for the government, to be pursued as fiscal circumstances permit.

For the last two years, thanks to a UnitedFuture initiative in 2007, all donations to charities have been eligible for a 33% tax rebate, with the old maximum claim allowable of a miserly $633 abolished.

It is too soon to say how the threshold changes are going, but on returns received to date for the 2008/09 income year, $184 million in donations tax credits have been claimed – a 61% increase of $70 million in the first year of lifting the threshold for these credits.

From January this year payroll giving has been introduced, and to date, more than 120 different employers, covering some 7000 employees, have introduced payroll giving schemes.

When the GST rate rises to 15% in October, those on main benefits and fixed incomes, including New Zealand Superannuation and Government Superannuation, will be fully compensated immediately for that increase, with further cost of living adjustments due in April 2011.

That is quite a change from the last time GST was raised in 1989, when the Lange Government put up GST by 25% without any compensation, even for those on low or fixed incomes, and barely six weeks notice, all points Labour conveniently overlooks today.

And, following the recommendations of the Tax Working Group, there have been significant changes to the tax arrangements relating to investment property, most notably with respect to the removal of depreciation and the proposals to treat LAQCs on the same basis as limited partnerships.

The number of LAQCS has exploded since their introduction in 1992, rising by almost 240% during the term of the previous government to more than 130,000 entities.

Between 2000 and 2008 the value of their tax losses rose to almost $2.3 billion, a jump of just under 400%.

It is worth noting that the removal of the tax distortions affecting the investment property market, where an overall $200 billion dollar investment shows annual losses of up to $500 million costing about $150 million a year, has been achieved without resorting to draconian measures like a land tax, a capital gains tax, or a risk free rate of return method, measures I was very pleased to see the Prime Minister rule out at an early stage.

Nor have we found it necessary to introduce a so-called bright line test whereby the gains on property sales within a specified number of years would be taxed, or to abolish the ring fencing of losses provisions currently in the law.

Rather, we are increasing the resources available to Inland Revenue to carry out more tax audits - nearly $120 million over the next four years.

This is based on the success of the $14 million increase in resources provided to the department in 2007 to police property transactions, which have already produced a return several times in advance of that figure.

I am expecting the latest moves to boost revenue by nearly $750 million over the next four years.

At the same time, we are cracking down on the great Kiwi pastime of finding loopholes in the system to exploit for tax and benefit purposes, most notably the 9,300 families identified by the Tax Working Group as using investment property losses to reduce their taxable income so they could qualify for Working for Families tax credits.

And we have signalled more work is to be done in that area to close other loopholes.

For many New Zealanders, such “gaming” of the system simply offends their basic sense of fairness.

Overall, the package we have produced is prudent, and responsible.

When our opponents decry it with bumper sticker slogans like “tax breaks for the rich” and “soft on property investors”, we can only conclude as follows.

A vote for a future Labour/Green Government and for individual Labour/Green candidates will not only be a vote for higher taxes for higher income earners, but also for a capital gains tax on property transactions, and quite possibly a land tax.

There is nowhere else for them to go, and New Zealanders will therefore face a stark choice.

Of course, all our efforts to reform the tax system will amount to very little if they are not matched by similar efforts to modernise the way the system works.

That is why I have been placing a considerable parallel emphasis on bringing the administration of our tax system into the 21st century, with a much greater reliance on electronic interactions, very much like the way we do our banking at present.

Here is a figure to ponder – every working day Inland Revenue currently sends out about 100,000 individual items of correspondence to taxpayers, that is around 26,000,000 items a year, not bad for a population of just over 4 million people!

We have to change and move away from that paper-intensive system, and the Transform IR project you will be hearing more about over the next couple of years will do just that.

We will be starting with the administration of the student loan scheme.

With an outstanding student loan liability of around $10 billion, and over 500,000 former students in New Zealand and elsewhere with outstanding loan balances, this is a significant asset that the Crown needs to manage more effectively, and the Budget measures are part of ensuring that.

The move to what will be an essentially electronic banking model for managing student loan accounts is not only overdue but was also strongly supported during the public consultation process last year.

It is the way people, particularly young people, are comfortable doing their business these days, and we have to “get with it”.

Following the student loan changes, due to be made by early 2011, the PAYE system will be next, with a discussion paper on how that might be reformed due out shortly

My aim will be to follow that up with legislation later in the year.

Many of the changes I have outlined have been foreshadowed in UnitedFuture’s confidence and supply agreements with the last two governments, and that is obviously no coincidence.

In addition, as part of our agreement with the current government, I will be introducing legislation in the next couple of months to allow parents raising dependent children up to the age of 18 years, the option to split their incomes between them for tax purposes, thus allowing them to reduce their tax liability.

All these changes are designed to improve the lives of middle New Zealand families – the true champions of our society – and a cause UnitedFuture is proud to be committed to.

These, after all, are the people who make our community tick – who run the school boards and the sports clubs, who join the service clubs, and who genuinely care about the state of their communities.

They are not hell-bent on selling our state assets or slashing government’s social spending, nor do they want the government telling them what they can and cannot do, or providing everything for them.

They just want to get on with their lives, on a live and let live basis, knowing there is someone in government who understands and respects their concerns, and stands up for them.

They are, for example, the parents who worry their children will find no future in this country, and that they will join that huge brain and skills drain I spoke of earlier.

I am sick and tired of hearing the values and the aspirations of middle New Zealand families derided as dull and boring – parents’ fears their children may end up living overseas and they may never get to see their grandchildren should not be derided.

I am sick and tired of seeing people who work hard to get ahead and do the best for their families derailed by those who rip off the system, or do not pay their fair share – just because they have been able to organise their affairs the right way.

I think the good, honest people who do their best, day in and day out, who are long-suffering and often uncomplaining, deserve more of a break as far as government is concerned.

That has been UnitedFuture’s role – promoting positive change for middle New Zealand families, and filling exactly the same role as the Liberal Democrats do in Britain, which is why we have endured against adversity to date.

Looking at the current political landscape, National appears odds-on to win again next year, but the dark clouds already are gathering.

Its success to date has come because the Prime Minister in particular has been extremely careful so far not to become hostage to traditional conservative policies or interest groups.

But while National looks set to win comfortably the largest representation in Parliament again next year, its support will most likely erode somewhat.

It is highly unlikely to be able to govern on its own.

That means National will be even more reliant on its support partners in the next Parliament.

And that is where the dark clouds now gathering start to look decidedly stormy.

ACT’s right wing is already becoming impatient and has shown no hesitation in trying to throw its weight around, well beyond the limits of its electoral mandate

It has made it very clear that the Government’s reforms are too slow and too moderate for its liking – it still wants to wind the clock back to pick up where Sir Roger Douglas was forced to leave off in 1988.

For its part, the Maori Party will be far less tolerant of being rebuffed than it has been in recent weeks.

It will certainly want much more than lip service and personal warmth on issues like devolution; the future role of the Treaty of Waitangi; and, closing the social and economic gaps between Maori and Pakeha, as its the very future will depend on its making significant progress in each of these areas during the next term.

National therefore faces the unenviable possibility of being the largest party in Parliament – indeed the only party capable of forming and leading a government after the 2011 election – but with partners whose core demands are likely to stretch it in completely opposite directions.

And both those directions would take it far away from its core support base and the centre ground pragmatism that has characterised the Key administration to date.

The Budget tax package is a careful mix of carrot and stick, with clear incentives for people who want to get ahead, and an overriding commitment to fairness and transparency.

It modernises and refocuses the tax system, without going completely overboard

In so doing, it sets the Government’s direction for the remainder of this term and beyond – it is flexible, pragmatic and realistic.

Just like middle New Zealand.

The challenge now for the Key Government will be to retain its focus in a likely second term, without being dragged off in different directions by zealous support partners.

To keep on track, National needs UnitedFuture because our mixture of a hard head, with a warm heart provides the balance this government needs, to ensure that while it balances the chequebook, it also upholds social justice and compassion.

As I said at the outset, we have come a long way in tax policy change since October 2005.

The important thing, now, is not to put it all at risk in the future.

ENDS

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