The net fiscal impact of National’s tax and spending changes

April 10th, 2012 at 2:00 pm by David Farrar

I’ve blogged previously on the outrageously dishonest spin from Labour that tax revenues are down 4% of GDP over four years, and trying to assert it is all due to the one set of changes in 2010. Even some journalists who should know better have repeated such absurdities.

I’m going to blog in two parts on this issue. The first part will be today looking at what the Treasury macro-economic advice was for the impact of the tax and spending changes, and tomorrow (if I have time otherwise later in the week), I’m actually going to analyse the actual changes in tax revenues through the 2008 BEFU, the 2008 PREFU, 2008 DEFU, 2009 BEFU, 2009 HYEFU, 2010 BEFU, 2010 HYEFU, 2011 BEFU, and finally the 2011 PREFU. This looks at the changes in overall tax revenues, individual tax revenues, corporate tax revenues and GST.

It is important to understand you need both the forecasts of what a change will do, and what actually happened. Neither are the total picture, but together they give us a reasonable picture.

You see the reality is that if Treasury says (for example) hiking the top tax rate from 33c to 39c will bring in $900m/year of extra revenue, and a Government does it, and revenue only goes up $700m, then no-one really knows why the revenue gain was less than projected. It might be that it did increase revenue by $900m, but that economic growth was flatter and so taxable income was lower. Or it could be that the increase lead to greater tax avoidance, and the increase did not achieve as much extra revenue as projected.

It is easy to diss Treasury projections – even I have done so. But it is worth noting how massively complicated it is to forecast tax tax over an entire economy. Many individual companies have problems forecasting income just for that company. Now imagine having to forecast income for the aggregate of every company and person in New Zealand, without having the knowledge of what is happening in individual companies.

What we have below is the official net fiscal impact as forecast by Treasury for ’s tax and spending changes. As you will see the total effect of these tax changes is negative during the 2008 – 2010 period, which is when there was a fiscal stimulus policy to help cushion the recession, and in the first two years, providing support to the economy during the recession, and have been net positive from 2010 onwards.

Net fiscal impact of the Government’s tax changes ($million increase (decrease) in the operating balance)

 

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

Election tax package1

(133)

(238)

(37)

188

198

198

Budget 2009 cancellation of 2nd and 3rd tranches2

105

553

956

999

999

SME tax package3

(294)

(189)

214

(108)

(108)

(108)

Budget 2010 tax package4

(460)

(90)

(40)

175

Budget 2011 tax changes5

537

783

823

Total

(427)

(322)

270

1,483

1,832

2,087

 1. fiscal impact = revenue (2/3*removal of R&D tax credit + KiwiSaver changes + cancelling remaining tranches of Labour’s ) minus costs (personal tax + IETC). Source: Cabinet Paper CAB(08)585.

2. cancellation of the 2010 and 2011 tax cuts as announced in the 2009 Budget. Source: Treasury Report T2009/418.

3. SME tax package as announced in February 2009. Source: BEFU 2009, Table 1.7.

4. fiscal impact = revenue (GST increase + depreciation + LAQC + thin cap + WFF + GST base + tobacco + increased audit) minus costs (personal tax + company + PIE and savings vehicles + GST compensation). Source: Budget 2010 Executive Summary, Table 1.

5. savings from changes to KiwiSaver and WFF tax credits. Source: Budget 2011 Executive Summary, Table 2.

It is worth recalling that during this period Labour opposed every single spending cut made by National.

Over the six years of National’s first two terms, the total projected impact of National’s tax changes (and cancellation of spending commitments) has been a net improvement of $4.9b. In other words compared to the policies put in place by Labour in 2008, National’s changes were projected by Treasury to result in $4.9b more revenue over two terms.

It is worth noting these are only the direct tax (and cancelled spending commitments) changes. This is not taking into account National slashing to the contingency for new spending from over $2b a year to $800m and eventually zero. That has also had am impact in the billions.

Now as I said, we will also look tomorrow at what actually happened to tax revenues, but many factors impact tax revenues as well as policy changes. These figures for now show how preposterous Labour’s deception is about how the 2010 tax package is somehow primarily or totally responsible for a decline in tax revenue of 4% of GDP or $7b/year.

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27 Responses to “The net fiscal impact of National’s tax and spending changes”

  1. Simon Arnold (98 comments) says:

    I think you’ll find that it is much easier to forecast value added (say) at a country level than at a firm level (particularly when you control a good chunk of the economy directly). The country risk will be better estimated and the random firm level perturbations will be subject to the law of large numbers as it were.

    Perhaps Curia will start offering samples of one because it’s more accurate?

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  2. Graeme Edgeler (3,267 comments) says:

    So what you’re arguing is that National is the high tax party?

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  3. Fentex (867 comments) says:

    The argument that you have to reason according to Treasury’s forecasts doesn’t make any sense when Treasury’s forecast is part of the debate. It seems likely from some of thier past predictable mistakes Treasury makes ideologically driven choices in their forecasting.

    If two parties are having an ideological argument about what is best in tax policy it makes no sense for one to cede trust to an apparent ally of the other.

    And if the argument is that the result of the tax changes are bad there’s no requirement to be nice because the changes may have been made trusting the best possible advice at the time. There’s no crying in politics (except for crocodiles), if you make a call and it goes badly you are going to get dumped on. The job you asked for was the thankless task of being responsible and you don’t get to blame others for making your choices.

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  4. lyndon (330 comments) says:

    I vaguely recall from last time these numbers aren’t actually what you’d think – for eg I’m not sure deciding-not-to-cut-taxes counts as an increase in actual income.

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  5. dime (9,430 comments) says:

    “So what you’re arguing is that National is the high tax party?”

    Or the “not so blinded by ideology they will fuck the country” party…

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  6. slijmbal (1,211 comments) says:

    Treasury do appear to consistently underestimate ‘badness’ e.g. forecast tax revenues in bad times are consistently under their estimates and underestimate ‘positivity’ i.e. tax revenues during good times are consistently over their estimates

    Feels like a deliberate conservative policy

    Based on that I struggle to trust their planning at a specific level – my bollocks detector goes off when I see treasury numbers in this area – their policy is a different matter but that’s the difference between strategy and management. They have decent policy and crap forecasting.

    None of this detracts from an attempt to be relatively fiscally neutral and while I also have no pesonal faith whatsoever in the modern Keynesian approach of government spending to attempt to ameliorate recessions that is what National committed to.

    in my long winded way I’m agreeing with you – even though I don’t agree with what national did.

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  7. tvb (4,206 comments) says:

    Labour which ever way you look at it is a high tax high spending party that drove this country into recession with a big fiscal problem. Labour Governments eventually run out of money and they get thrown out of office and leave the tories to do all the hard stuff. Then they stroll back into office as if nothing has happened and carry on spending and taxing.

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  8. mikenmild (10,720 comments) says:

    tvb
    Labour caused the recession? Really? An alternative view of history might be that Labour governments tend to make significant changes (for good or ill) and National governments maintain the status quo that they inherit. I think that thesis better fits event than yours.

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  9. East Wellington Superhero (1,151 comments) says:

    @tvb. Exactly.

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  10. slijmbal (1,211 comments) says:

    @mm

    “Labour caused the recession? Really? An alternative view of history might be that Labour governments tend to make significant changes (for good or ill) and National governments maintain the status quo that they inherit. I think that thesis better fits event than yours.”

    Recessions happen but governments can make them worse by excessive bad spending i.e. Labour. It’s pretty obvious that the excessive and poor quality growth in government spending over 9 years pushed us faster in to recession and made it harder to get out as National did not unwind it fast enough for fear of losing power.

    Labour’s days of making a difference are well gone – we now have a government willing to spend other people’s money to get in power via a steadily growing welfare state and another trying not to get voted out while trying to unwind pork barrel politics.

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  11. flipper (3,557 comments) says:

    DPF ….
    There are three (3) other issues:

    1. If the (any) Government(raises $100 in tax only $78 is available for redistribution owing to the cost of collection, policy advice, and re-distribution costs.

    2. If a Government invests $100 (of tax gathered monies) in a project as a promoter, participant, primary shareholder or a contributor in any other way, there is a loss of $45 per $100.

    3. If any Government lowers taxes it does NOT LOSE MONEY – it never had any to start with. It simply stole LESS

    Soureces: Treasury and IRD (check for yourself!)

    Talk of Government monies and Government investment is just stone-age crap.

    The other tragedy is that media simpletons (circa 2012), ignore reality.

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  12. mikenmild (10,720 comments) says:

    slijmbal
    Got any examples of the present mob actually doing anythnig to ‘unwind pork barrell politics’? Or is that just another ‘aspirational’ goal?

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  13. bhudson (4,734 comments) says:

    @mikey,

    Well we could start with an expectation that those on benefits who can work, do. Or perhaps seeking to recover student loan debt from those who have benefited from the funding and gone overseas.

    There are a couple to start with. The pork barrels in these cases applied to all Labour candidates.

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  14. wat dabney (3,671 comments) says:

    Got any examples of the present mob actually doing anything to ‘unwind pork barrel politics’? Or is that just another ‘aspirational’ goal?

    How would one even go about such a thing? If the opposition is committed to returning to power by plundering a minority in order to bribe a majority, how do you fight that? Labour, the Greens and Winston Peters First will promise anything to get into power, no matter how much damage it does or that it will inevitably lead to a Greek-style meltdown that has the poor committing suicide rather than forage through the garbage for food. These scum would sooner reign in Hell (and collect their gold-plated pension) than serve in Heaven.

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  15. mikenmild (10,720 comments) says:

    No, I was just asking for an example or two of the present government rolling back measures initaited by its predecessor. Even wat seems to think that’s impossible…

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  16. slijmbal (1,211 comments) says:

    @milk – reduction in civil service jobs springs to mind

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  17. mikenmild (10,720 comments) says:

    I was perhaps something a little more ambitious than a little pruning, but if John Key wants to claim that as his biggest achievement then I’m sure he’ll have his fair share of admirers.

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  18. Johnboy (14,998 comments) says:

    “So what you’re arguing is that National is the high tax party?”

    The money has to come from somewhere to keep the Murris happy! :) :)

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  19. slijmbal (1,211 comments) says:

    @mm – but that is exactly my point – Labour spend up large and National at least don’t and sadly only snip at the edges as they don’t want to lose power. However, thank god they keep labour and the greens out.

    I seem to remember Labour increased government spending by $10bn+ in their last five years in power – if you exclude Chch and the financial guarantees they inherited from Labour – National don’t come even close – and yes they can be ignored as one off events.

    anyway my original point responding to yours which you appear to be avoiding answering is that Labour did make the recession worse and don’t actually make a difference anymore other than by spending up large. How about responding to my points as I responded to yours?

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  20. mikenmild (10,720 comments) says:

    I’d be happy to comment on any evidence you have that Labour made the recession worse.

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  21. slijmbal (1,211 comments) says:

    @mm how about you start by showing evidence that

    “An alternative view of history might be that Labour governments tend to make significant changes (for good or ill) and National governments maintain the status quo that they inherit. I think that thesis better fits event than yours”

    you made the 1st statement

    anwyay pretty obvious you’re just a troll so I’ll give up responding to as you are just trying to distract from the original point that National attempted to be fiscally neutral

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  22. mikenmild (10,720 comments) says:

    Just look at the basic history of the National Party in office:
    1949-57 – did not roll back any of the welfare state developed 1935-39
    1960-72 – admittedly not much to roll back after Labour’s 3-year stint
    1975-1984 – did convert Labour’s NZ Superannuation to National Super – how did that go? Not sure what else they reversed.
    1990-1999 – initially tried out outdo Labour with the Rogernomics stuff, but soon got tired of that, fired Ruth Richardson and settled sown for a quiet life
    2008- well, what have they done? – shuffled some taxes around (‘you pay more and we’ll pay less’) and fired a few thousand civil servants.
    I know they are a conservative party, but what do they ever do?

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  23. eszett (2,336 comments) says:

    …that National attempted to be fiscally neutral

    and failed

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  24. Tauhei Notts (1,608 comments) says:

    WTF is PREFU?
    WTF is BEFU?
    WTF is DEFU?
    WTF is HYEFU?
    WTF is christ knows what EFU?
    WTF is SME?
    Please move away from that plate of alphabet soup. It might be what is making you podgy.
    I already know what IETC, WFF, LAQC, PIE and LTC stand for; but the others you mention have me beat.
    After reading your abbreviations I mentioned the acronym for the Fellowship to Understand Christian Knowledge.

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  25. UpandComer (506 comments) says:

    milkenmild

    The tax changes were really big.

    They are trying to change education

    They’re doing the biggest changes ever to welfare.

    They’ve made health a good thing for a government.

    They’ve stopped building prisons

    They’ve stopped the rot in the public service and got the same results with much less money

    You can’t roll back things like working for families in a recession.

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  26. fooman (38 comments) says:

    “The tax changes were really big.”

    Fiscally neutral apparently.

    “They are trying to change education”

    Not doing a good job…

    “They’re doing the biggest changes ever to welfare.”

    By fiddling around with ~12% of the welfare budget, ignoring the elephants in the room of the age-related benefit and working for families.

    “They’ve made health a good thing for a government.”

    But not so good for the underfunded DHB’s.

    “They’ve stopped building prisons”

    Except for the prisons they are building.

    “They’ve stopped the rot in the public service and got the same results with much less money”

    How do I know you haven’t being paying attention? What rot? And much less money? The govt spent an extra 20 billion dollars in 2011 compared to 2010.

    “You can’t roll back things like working for families in a recession.”

    But you can give people the sack, apparently.

    FM

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  27. mikenmild (10,720 comments) says:

    fooman
    I am jealous of your riposting skills.

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