Budget 2010 - A Fresh Perspective

08 Jun 2010

Budget 2010 - A Fresh Perspective

"This Budget is about our long-term objective of lifting New Zealand's growth rate and New Zealanders' living standards."[1]

Why the change in approach?

The theme for Budget 2010 was well signalled. Significant changes were expected. The Tax Working Group, an independent group established in May 2009 and supported by Minister of Finance, Hon Bill English and the Minister of Revenue, Hon Peter Dunne, presented a set of core tax policy recommendations to the Government. By and large the recommendations were well rationalised and acted as a catalyst for the changes announced in Budget 2010.

What has happened?

Budget 2010 represents a sea-change in New Zealand's tax policy. Budget 2010 has firmly established a move away from direct to indirect taxation, and the Government has indicated this will remain its position for the medium term. Indirect tax will become an even more key component of taxation revenue.

Income tax

The lowering of the corporate tax rate to 28% from the 2011/12 income year is a welcome development. It is often asserted that high personal and corporate taxes are damaging to growth, and the New Zealand corporate tax rate is higher than many other OECD countries. The lower corporate tax rate should act as an incentive for overseas investment in New Zealand and will increase New Zealand's competiveness with Australia.

The closer alignment of the top personal and corporate rates is also encouraging. New Zealand is more likely to grow when businesses focus on what they do best - selling goods and services - rather than devising clever ideas to minimise tax. 

GST

The increase of GST from 12.5% to 15% will not come as a surprise to many. This change is consistent with the Tax Working Group's view that people and company profits are moveable, whereas capital and consumption are far less so. The Government is anticipating that the increase will raise an extra $2 billion in revenue. The Government could have raised this revenue from other methods, such as a capital gains tax, but it decided on what is probably a more palatable option for its key supporters.  

New Zealand is seen as having one of the purest forms of GST in the world. The decision for GST to continue to apply without further exemptions will consolidate this position and is to be commended.

The increase in GST has not come without its critics. Some commentators argue there are only marginal benefits to be had when the drop in corporate and personal tax rates are compared against the rise in GST. There is an argument to suggest that, instead of funding the corporate tax cuts by increasing GST, spending cuts could have been adopted. Lower government spending and lower taxes are seen in some circles the best way to encourage productivity growth. The Government works in an MMP environment and needs to be realistic on what it can achieve - and significant spending cuts are a threat to our economy, at least in the short term, when the world is recovering from the global financial crisis.

Government spending

New Zealanders, for generations, have expected state provision of services such as health and education, along with social welfare (including superannuation). These items account for almost 60% of government spending. This spending is regarded as core by too many voters, so there are political limits on any spending cuts.

In the current economic environment the extent of the tax cuts, the move away from corporate and personal taxes, and the focus on more efficient government spending should, as an overall package, be commended.

Where to from here?

These changes may not mean New Zealand will catch up to Australia by 2025. New Zealand may be still far from it. The Government has given a clear sign that it believes we are more likely to close the gap with Australia by adopting a fresh perspective on taxation. Budget 2010 gives New Zealand a much stronger opportunity of materially lifting its growth rate and living standards. How will this occur? Most individuals will have more income to spend or save. Businesses will earn higher after-tax profits. The tax burden will be more evenly spread throughout New Zealand.

Many talented New Zealanders will realise their tax bill is likely to be smaller in New Zealand than in Australia. Hopefully they will re-consider a move abroad purely for financial reasons.

The flow-on effects will take time to materialise but, at the very least, Budget 2010 represents a very encouraging start to what will be a long road ahead to significantly raise New Zealand's income position in the OECD rankings.

[1] Minister of Finance's Executive Summary, Budget 2010, 20 May 2010

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Stephen Ward

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