Tuesday 22nd Jun 1999

ACT - amendment to confidence motion

extract from speech to Wellington Central constituency meeting

Hon Richard Prebble CBE

Leader ACT New Zealand, MP Wellington Central

At my breakfast constituency meetings I regularly talk about issues of the day. Today the issue is tax cuts. I saw our Prime Minister on Crossfire last night (as an aside, it's my view that the Prime Minister's performance was impressive and an indication of what a formidable campaigner she will be ). I heard the Prime Minister's comments regarding tax cuts and as an experienced Parliamentarian, it's my view that a Prime Minister would not make such comments unless she herself has determined in favour of tax cuts. It's also clear from Bill English's comments that the Government has been considering the matter.

I can add a further piece of information. The ACT Party, with the help of our financial experts, has completed analysis of this year's Budget and the fiscal forecasts. I formally wrote to the Prime Minister on 13 June stating that even within the very conservative parameters the Government has set, there is room for an immediate 3 cents cut.

The arguments in favour of tax cuts are overwhelming.

The first reason is that the economy needs it. There are over 140,000 New Zealanders unemployed, which is proof positive there is spare capacity in the economy. A tax cut is the quickest way to stimulate growth and employment. Work by economists such as Patrick Caragata has determined that a 1% tax cut will generate 40,000 new sustainable jobs over 4 years.

The second reason for a tax cut is that middle New Zealand deserves one. Middle New Zealand has not had the benefit it should have from tax cuts because of this Government's habit of replacing them with user charges such as the recent driving licences.

A third reason is the loss of jobs and people across the Tasman. Australia has a lower overall level of tax than New Zealand and its economy has been outperforming ours. I find it significant that the Prime Minister has not yet replied to my letter. It's my experience that when governments have made a clear decision, it's a quick response, but if one writes at a time when government is reconsidering its position, it results in delay in reply.

I believe the media have failed to pick up the significance of the Prime Minister's comments of waiting for further economic data. I have been stating all year that it's my view that the economy is performing much more strongly that the Reserve Bank and Treasury forecasts have predicted.

The ACT Party has very good intelligence from the business community that confirms very strong economic growth. This means that the government's tax revenues will be higher than forecast, so making tax cuts completely credible. ACT recommends in favour of a 3 cent tax cut in corporate and income tax . This is because flattening the tax rate gives the best economic return. As the corporate rate is the investment rate, flattening rates will encourage investment. As I wrote in my letter to the Prime Minister, ACT favours tax cuts now rather than waiting to announce it as part of an election manifesto. The best politics are, in fact, good government.

There are sound fiscal and social reasons for a tax cut and delaying the cut will inevitably result in some of the public dismissing it as party politics rather than acknowledging the sound reasons for the policy.

ACT has also indicated to Government that we will be raising the matter in Parliament by moving an amendment to a confidence motion, that income tax be cut by 3%. We have further pointed out to Government that there is $600 million unallocated spending in this year's Budget which is available to be used for tax cuts.

I welcome the Prime Minister's statement last night. ACT will be urging the Government to pass a tax cut now, rather than the more gimmicky tax cuts to come into effect some time in the future.

ends

attached: letter to PM

Hon Richard Prebble CBE

Leader ACT New Zealand

13 June 1999

Rt Hon Jenny Shipley

Prime Minister

Dear Prime Minister

Tax Cuts

I write on behalf of ACT New Zealand in response to the hints of further tax cuts that Bill English, Treasurer designate, has been making. As ACT is the low tax party, we welcome any steps towards reducing the tax burden. The economy needs a tax cut and New Zealanders deserve it. However I am concerned that the tax cut is being promoted purely as a way to embarrass the opposition. ACT believes that the best politics is good government and tax cuts should be advanced on their merits.

Adding a new 30 cent tax rate just complicates the tax system. I remind you of the mess Labour is now in with fringe benefit tax having proposed a 39 cent tax rate. A 30 cent tax rate causes similar problems - is a person to have a higher tax on the company car than on their income?

ACT has some practical solutions and some new ideas. The ideal is a flat rate of tax. The tax cut that will create the biggest increase in investment and jobs is to lower the top rate of tax. A three cent tax cut will still only bring the corporate tax rate to 30 cents, the same as is being proposed for Australia.

A three cent tax cut, if there are no incentive effects, that is no new jobs, growth or extra activity, costs $800 million. As there is $600 million in unallocated expenditure in this year's budget, such a cut is affordable. The top rate of tax cuts in at just $38,000. In most countries, people do not reach the top rate of tax until they are in a much higher income bracket. If the Government wishes to help middle New Zealand it could, in addition to cutting the top rate of tax, also lift the point at which the top rate of tax cuts in.

I ask the government to give this proposal urgent attention. ACT's proposal is sustainable. Such a tax cut should be announced now and introduced immediately. Any delay will result in the media labelling the tax cut as an election bribe. Tax cuts are good policy and should be proceeded with despite the election, not because of it. I am happy to take your Minister through the fiscal figures to demonstrate how ACT's proposals are responsible and affordable.

Yours faithfully

Hon Richard Prebble CBE

LEADER, ACT NEW ZEALAND

MP, WELLINGTON CENTRAL

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