The importance of low inflation and tax cuts

October 4th, 2010 at 9:00 am by David Farrar

Just been looking at an old press release from Bill English. It compares the nine years from Sep 90 to Sep 99, the same period from Sep 99 to Sep 08 and the 21 months since then to June 10.

The average weekly earnings went up 27% in the 90s, 37% under Labour and 7% since Sep 00. The average increase per year is 3.0%, 4.1% and 4.0%.

But if you take account of tax paid, to look at what someone on the average earnings/wage gets to take home, then the increases are 33%, 33% and 11% – or annualized it is 3.7%, 3.7% and 6.3%.

Finally thought you want to look at the purchasing power – has someone earning at the average (mean) had their purchasing power increase during each of those periods, and by how much. Now during each period was 16%, 29% and 2% Annualised this is 1.7%, 3.2% and 1.2%. This is worth remembering when Labour talks about cost of living.

So what was the increase in real after tax average earnings. They were 15.5% from Sep 90 to Sep 99, 3.0% from Sep 99 to Sep 08 and since Sep 08 8.7%. On an annualized basis, real went up 1.7% a year under National, then only 0.3% a year up until Sep 08, and a massive 5.0% a year since Sep 08.

Average FT Earnings Increase/Year
Gross Net Real Net
Sep 90 – 99 3.0% 3.7% 1.7%
Sep 99 – 08 4.1% 3.7% 0.3%
Sep 08 – Jun 10 4.0% 6.3% 5.0%

This table above shows the difference. I’ll update it after we get the Dec 10 figures which will include the latest , but also the GST impact.

The moral of the story is wage growth by itself is not enough. You also need low inflation and tax cuts to offset fiscal drag.

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39 Responses to “The importance of low inflation and tax cuts”

  1. Adolf Fiinkensein (2,917 comments) says:

    “You’re Better Off under WHO?”

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  2. Radman (143 comments) says:

    Inflation is the enemy of the poor, yet those dimwits on the standard wanted prime money pumping from english to get the economy going. As I said, dimwits.

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  3. Inky_the_Red (761 comments) says:

    What I recall about the 1990s was that unemployment averaged 8%.

    If inflation is so bad why increase GST?

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  4. Pete George (23,683 comments) says:

    Comparing averages over two 10 year periods with one 20 month period in which there were tax cuts could give you uneven results. Why not compare the last 5 years with the previous 3 five year blocks, or something more even. Otherwise it’s too easy to pick disparate periods to suit the figures you want.

    Tax cuts over all of twenty years might please some people but it would make a huge difference to revenues and services.

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  5. redqueen (582 comments) says:

    Pete, the period being targeted is hardly a complementary one. If we were in the middle of a boom, I’d see the point, but our economy is not exactly roaring ahead. So achieving solid earnings growth, compared with under the ‘good years’, is quite impressive and the point has been well made.

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  6. dime (10,102 comments) says:

    yea! ya need to do it in 5 year blocks. that way the labour blocks can benefit from the National years ffs

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  7. Manolo (14,049 comments) says:

    Please remind me: why did we need an increase in GST? What about the new tax introduced by Key/Smith, the ETS?

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  8. DT (104 comments) says:

    Superficially this analysis seems to point in a certain direction, but what it ignores is the governement’s books! A government that runs surpluses to pay off debt will not be lowering after tax wages, but a government which borrows to fund tax cuts will lower after tax wages. But the former pays for the latter. It is shameful that English is using such superficial analysis.

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  9. Chuck Bird (4,924 comments) says:

    We should not have to wait for tax cuts to offset fiscal drag. The tax brackets where tax rates increase should be adjusted annually for inflation. The way government could not increase their tax take by doing nothing or worse by encouraging inflation.

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  10. Pete George (23,683 comments) says:

    I’ll judge National’s performance on six years. Or nine. The key will be if they can sustain improvements and make fundamental changes that will make a long term difference.

    The tax brackets where tax rates increase should be adjusted annually for inflation.

    Yes! Otherwise we will continually slip backwards until some “generous” government gives us a bit of it back, eventually.

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  11. bhudson (4,740 comments) says:

    Inky,

    It is spending that is inflationary. The move to consumption-based taxes provides incentive to save and is therefore more a downward pressure on inflation.

    The govt has acknowledged that the immediate effect of tax cuts may have some upward pressure on inflation from increased spending, but that is forecasted to taper off quite quickly.

    Ultimately the GST rise will be beneficial to managing inflation. The next important piece in that puzzle is to increase real wages through increasing our economic wealth – through growth, not through redistribution, which is just robbing Peter to pay Paul. The net idea is increase people’s disposable income and allow them the choice of what to do with that income, while providing incentives to save.

    (The balancing factor, or dichotomy, is that personal spending – while inflationary – provides some benefit to the domestic economy, particularly retail sector and employment (although also the possibilty for positive spins offs for local manufacturers too.))

    Of course the other spending area which will push inflation up is govt spending. Ultimately, the more govt spends the more the citizens pay twice – firstly through increased taxation and secondly through cost of living as inflation rises.

    So simple plan = grow the economy, grow wages, provide savings incentives and minimse govt spending [which means spend what you need to provide the services you want efficiently and effectively, but no more than is necessary to do that – which should, by definition, be enough.)]

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  12. PaulL (6,045 comments) says:

    Hmm, robbing Pete George to pay PaulL. I’m all in favour. :-)

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  13. jackp (668 comments) says:

    bhudson, this is why gst didn’t have to be raised—– government spending. Since National has been in , the government’s price tag has gone up by 2 billion and it is borrowing 240 million a week. Helen Clark’s government hired up to 16000 civil servants, not including the contractors, leases, etc. What I have witnessed in the last two governments is government spending is a political decision, not an economic one. Government control on spending won’t happen and this is ashame because taxes could be lowered very quickly as a result of cutting the waste of government.

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  14. s.russell (1,646 comments) says:

    A very revealing set of figures. Thanks, DPF.

    I also endorse Chuck Bird. Tax brackets should be indexed to inflation, or better, to average wages. It would stop Govts increasing income tax by stealth.

    bhudson, nice explanation of why the GST/income tax tradeoff is a good thing. We need to get the economy better balanced with more saving and less borrow-and-spend. The long-term benefits of that are huge.

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  15. dimmocrazy (286 comments) says:

    Lies, damn lies and annualized statistics Farrar style.

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  16. Graeme Edgeler (3,290 comments) says:

    Surely the aftertax pay is only relevant if you also account for the services provided by the Government, and the cost to the user?

    For example, someone whose takehome pay is spent in large part on childcare, might not care that the tax rate is low if a higher taxrate meant childcare was a lot cheaper or free. Similarly, a low tax rate with a high cost for doctors visits, vs free or cheap doctors visits and slightly higher tax rate. While someone with health insurance the lower tax would be better, etc.

    If we want to know if we’re better off, then simple numbers for after tax earnings won’t really give much of a picture.

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  17. wikiriwhis business (4,119 comments) says:

    You also need businesses to stop raising prices every time there’s a wage rise. Hows that going to happen?

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  18. Falafulu Fisi (2,179 comments) says:

    Pete said…
    Tax cuts over all of twenty years might please some people but it would make a huge difference to revenues and services.

    FFS Pete, you’re all over the place here at Kiwiblog. Anyway, here are some research papers which are good reading materials for you, and they’re freely downloadable (in PDF format).

    #1) A Multinational Analysis of Tax Rates and Economic Activity

    #2) Capital Income Taxation and Economic Growth in Open Economies

    #3) TAXATION AND ECONOMIC GROWTH

    Also, get your mate David Cunliffe to read those references too, since he himself is detached from reality. There are more research papers on the topic (mostly free) which are available at either RePEC or SSRN for download (search on the topic). If you want to be an opinionated (like what you’re doing here – many posts a day), then it means that you have to be well informed (in whatever subject that is being discussed).

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  19. bhudson (4,740 comments) says:

    Graeme,

    “Surely the aftertax pay is only relevant if you also account for the services provided by the Government, and the cost to the user?”

    You could argue that should be factored in, but surely then, to retain balance and for an overall view, you should also factor in services that some people pay for, which govt pay for also to some extent, and which this additional private spending therefore helps to further subsidise over and above existing taxation?

    Or to use plain english… those people who choose to pay for private education, health insurance, disability/salary continuation insurance, etc are providing further public subsidisation and enabling the govt spending $ to be spread further across those who chose not to. (The examples above improve $/head spending in Education, Public Health Sector and ACC.)

    These could be argued as indirect taxation or a form of vicarious govt spending, so to argue that people might prefer to pay more tax for cheaper govt services, is ingorant of the fact that some already use income to further subsidise govt servcies (indirectly) and to raise taxes might threaten their ability to continue to do so (thereby worsening the overall position.)

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  20. Guy Fawkes (702 comments) says:

    I think we need bigger Government, more Clipboard Warriors, and paper shufflers. More red tape to deter Entrepreneurs and above all else a robust Shower Pressure Regulatory System.

    We cannot be trusted with precious water and we need our Civil Servants interfering much more in our Homes, and Families.

    I would like daily inspections by an Army of Government Workers. You can’t help but want them to have the very best pensions and never have to contribute. They should also get to keep their beloved Clipboards and Pens on retirement.

    Pens = Friends

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  21. Pete George (23,683 comments) says:

    I’m sorry Falafulu Fisi, why don’t you tell everyone to get a degree in Economics before they offer any opinions here on tax. The rest of us should just shut up and pay them.

    Do you have any informed opinion to add to this topic?

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  22. Falafulu Fisi (2,179 comments) says:

    Pete said…
    why don’t you tell everyone to get a degree in Economics.

    I never formally studied economics Pete (BTW, I am a physicist by training), however I have always tried to read as much as I can about economics (i.e., mainly from economics research publications) so I can be informed, because I am interested in debating economic facts rather than me making silly/piss-taking comments on the subject.

    Anyway, a tax cut equates to increase economic activity and growth. Govt needs to reduce its non-core services’ spending (again which equates to their falling revenues because tax cuts). Is that informed enough for a contribution here or not? How informed you want to be if you can’t spot that simple fact? I hardly discuss matters relating to law & legal issues, since it is not my domain of expertise and I would hesitate to jump in on a thread that discusses that topic. WHY? I am simply uninformed on (don’t know enough about) that topic.

    There are 2 commentators at RedAlert, Loota & Spuds who themselves suffer from a need to make comments on every topic on discussions at RedAlert even if they don’t know anything about that particular topic.

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  23. Pete George (23,683 comments) says:

    Anyway, a tax cut equates to increase economic activity and growth.

    I can understand that. My point was, you can’t keep cutting taxes to keep increasing economic activity and growth. I agree that Government should cut it’s spending, but that can only go so far until it impacts on services.

    I would have thought that ideally tax levels should be static (inflation adjusted) at some optimal level and not be used to stimulate and suppress economic activity.

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  24. burt (8,314 comments) says:

    This is a ridiculous thread DPF. You have gone and authored something that the lefties will need to consult Dr. Cullen on before they can think for themselves about it.

    Remember it’s not possible for govt spending to have an inflationary effect and remember that fiscal drag is good because it make the govt rich while making the people poor. Cullen had an army of apologists nodding their heads and casting their votes to support the expansion of the state while individuals got heavier and heaver into debt so Cullen could pay santa with our own money to buy our votes.

    It takes some major therapy to unwind the effect of Stockholm syndrome and leftist govt has the same effect where people get so dependent on the govt giving them back just enough of their own money that they are too scared to vote for personal responsibility (freedom).

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  25. jackp (668 comments) says:

    Pete George, I read somewhere that 60 percent of every dollar taken in is wasted by the government. Bureaucracies are the worst run organisations. They don’t have to be efficient, it is 3rd parties money(taxpayers) that they are spending. You could cut back a lot before the services would start to feel the pinch. It is the news media that always put fear in the public because they say that services would suffer. That isn’t true because they never follow up with facts. If services suffer, it is middle management that is being greedy.

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  26. Luc Hansen (4,573 comments) says:

    in a similar way to that we should listen to scientists about climate change

    Hmmm…

    waits around for Fellafullashit to respond to this challenge…

    Oh, hang on…

    since it is not my domain of expertise

    I guess I’ll be waiting a while.

    Personally, I like to have an opinion about everything, even if that opinion is simply following expert opinion.

    But then, I’n not a (failed) physicist.

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  27. Luc Hansen (4,573 comments) says:

    PaulL

    Seriously now, you miss the one overweening consideration that actually determines government policy – elections.

    For example, Labour had the right idea with their proposed carbon tax, although I have major objections to its method of implementation, and gave into pressure and changed to an ETS. All ETS schemes have proven not only ineffective, but counterproductive as the smartest suits in the world subvert it to their own financial ends (I think even FFS will agree with me on that one!).

    But right now, cutting taxes should be the last cab of the rank to ensure recovery. It only exacerbates inequality and actually stunts
    economic growth. I linked a little while ago to an IMF working paper that confirms this thesis.

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  28. bhudson (4,740 comments) says:

    Ah Luc,

    “Personally, I like to have an opinion about everything, even if that opinion is simply following expert opinion.”

    That is an interesting quote from you, given that you abused me a few days ago for not having an original thought. Mind you, hypocrisy is a virtue where your self-assessment is concerned isn’t it?

    What you are also saying is you pick a pack you might like to follow and then trail along barking other peoples’ thoughts as if they are your own.

    FFF does at least explain himself in his own words and is clear in his context. Whether or not one agrees with his views, he can be commended for being articulate and for displaying thoughts that are his own and not something he has merely swallowed from some pack pamphlet.

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  29. Luc Hansen (4,573 comments) says:

    bhudson

    you are an object lesson in equivocation.

    It’s quite an education, so thank you.

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  30. bhudson (4,740 comments) says:

    Luc,

    Another blatant piece of hypocrisy from dear old you is your common accusation of others employing ad hominem responses aimed at you when you are chief among the perpetrators. Let’s see, from just above:

    “waits around for Fellafullashit to respond to this challenge”…

    “But then, I’n not a (failed) physicist.”…

    Both unnecessary and not even defensible as response to a direct attack on yourself.

    The in your reply to PaulL you refer to FFF as FFS again.

    You really do show yourself up as an insignificant blight on humanity Luc

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  31. Luc Hansen (4,573 comments) says:

    bhudson

    as I have said before

    when in Rome…

    sometimes I am here for one purpose, sometimes for another…

    tonight, it’s another…

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  32. bhudson (4,740 comments) says:

    Luc,

    You might have trouble realising what you are here for from one moment to the next, but that is OK. There are some here that are still willing to help you help yourself. The bankruptcy issue is noticeably absent of late. Very encouraging. It gives me hope for mankind.

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  33. krazykiwi (9,186 comments) says:

    Low inflation is important for a couple of reasons. Firstly it helps our international trade competitiveness over time where our inflation rate is less than that our trading partners. Secondly it gives local businesses the confidence to invest in expanding their capacity as there’s more certainty about the return on invested capital. Low inflation is good.

    As for tax cuts, I’d forego these to see cuts in government spending so that we’re not borrowing another billion each month. PaulL’s 1:34 comment is right on target in that respect.

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  34. Luc Hansen (4,573 comments) says:

    bhudson

    I’ve yet to see any evidence of serious intellectual endeavour from yourself. I regret to inform you that patronising comments are like water off a duck’s back for me. And if the tripe you do write is evidence of the fate of mankind, we are fucked.

    Krazykiwi

    How do you counter the phenomenon whereby we follow these orthodox policies, get a reputation for such, so our dollar goes up and up while our international competitiveness goes down and down in the sector where it matters most for a commodity-based economy, exports?

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  35. bhudson (4,740 comments) says:

    Luc,

    “I’ve yet to see any evidence…”

    Then you are blind, lazy or ignorant. I suspect all three. Your judgement on me is of as much relevance to me as you are to this world Luc.

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  36. Luc Hansen (4,573 comments) says:

    bhudson

    whatever.

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  37. krazykiwi (9,186 comments) says:

    @Luc, our dollar is apparently the 10th most frequently traded currency in the planet, a statistic that worries me. If the kiwi appreciates as a result of us producing more of what the world wants at a price the world wants to pay then I’m all for it. However if it rises as a result of speculation and/or relatively high interest rates then I’m not so keen. We probably need more of the former and less of the latter. Living within our means would be a start.

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  38. Falafulu Fisi (2,179 comments) says:

    Luc said…
    Personally, I like to have an opinion about everything, even if that opinion is simply following expert opinion.
    But then, I’m not a (failed) physicist.

    Haha, Luc, failed in what? Exams? Career-wise? Knowledge? I’ve had a few years of post-doc R&D experiences, so that’s my ticket to prosperity, because it is applicable to anything. Luc, why don’t you stick to your area of toilet cleaning for a living, because that’s what you’re good at? Don’t take snide me in areas that you have no fuck’n clue about. You’re typical dumb-fuck zombie that has emerged from the illiterate world as an uninformed opinionated resident to inhabit the blogosphere with your irrelevant/daft arguments, thanks to Google & internet for educating you (instant information retrieval), because without the internet, you would still possess the knowledge of a 5 year old. Your 2 year daughter will grow up to think that you’re (the dad) her play or class mate because of your level of knowledge/comprehension (i.e., like a child).

    Physicists like me don’t fail. We can pretty much do anything either technical or otherwise, including toilet cleaning jobs as you do. I feel sorry for your daughter man, with that anti-everything poisons (anti-US, anti-white but pro-black, anti-Israeli, anti-capitalism, anti-corporations) that you expose her to. I wouldn’t be surprised if she grows up to follow you.

    Save you’re fucking energy that spout on the internet to educate your daughter. Educate her path to success & prosperity. If you don’t know how, I can help you out. Perhaps I can give you some hints of how to educate her. Here is an example. Two of my 9 year old group of evening students have been accepted to sit 3 Cambridge Exam AS-Level maths at the end of 2011 as private candidates in Auckland. This is the 7th form level (calculus & algebra) mathematics. They will still be going to primary school next year (2011), which is their final year (year-6 level), but they will be sitting the CIE (Cambridge international exams) at the end of 2011. Our preparations had already started and I can tell you, these 2 bright 9 year olds will be enrolling at University by age 12 or 13 (may be not full-time, but perhaps taking 1 or 2 papers).

    This is not new because it has already happened overseas. These kids learn with positive attitude (from me) and unlike you, your daughter will grow up to follow your negative attitude and that is sad man. If you want to save your daughter, then start teaching her right wing ideologies (self-responsibility, don’t expect others to give you a free-lunch, your problems are your own makings and don’t others, etc,…).

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