No tax cuts

August 19th, 2014 at 12:00 pm by David Farrar

Have been in the two hour (Pre-election Economic and Fiscal Update) at Treasury. These are required by law, after that period in the 1980s and 1990 when incoming Governments got a nasty surprise when they found out the Budget forecasts were so far out of date.

Key points made by Treasury are:

  • Surplus for 2014/15 now projected to be $297 million, down from $372 million
  • Core crown expenses forecast to be 30.3% in 2015, down from 35% in 2011. This is the critical figure – making sure spending doesn’t increase faster than the economy.
  • Economic growth last year was 3.3% against 3.0% Budget forecast. For this year now forecast to be 3.8% against 4.0% Budget forecast.
  • Unemployment forecast to be 4.5% by 2018
  • Average annual wage forecast to increase by $6,600 to $62,000 by 2018.
  • Household disposable incomes rose 7.1% last year and forecast to increase 4.0% a year in future
  • Inflation forecast to peak at 2.5% in 2016
  • Annual increases in house prices has declined from 10% to around 6% in the last year
  • Total cost to taxpayers from the Canterbury earthquakes now forecast to be $15.8 billion
  • Economy still growing strongly and above potential
  • Fiscal restraint remains beneficial and important to stop inflation
  • Trading partners still expected to have strong growth
  • Terms of trade will ease up earlier than in Budget, but will remain above historic levels
  • Should utilise upswing to strengthen Crown balance sheet
  • Weakness in global dairy prices is more a short-term issue, not a structural issue, and not inconsistent with Treasury central forecast

It is a good reminder of how fragile our surplus is, and how we also need to start paying off debt. We are still forecast to have the best of all worlds – a growing surplus, higher after tax household incomes, inflation under control, more jobs, and less debt. I contrast that with the tens of billions being promised by certain parties that will mean higher taxes, more debt and probably no surplus.

The downside scenario, if export prices drop down, and stay low, along with weaker household demand, would be no return to surplus until 2018. That is unlikely, but possible. Again, don’t spend the surplus until we have it.

There are a hint of possible . Treasury say “The operating allowance has been added to expenditure as a working assumption, but in practice would be available for a mixture of expenditure and revenue initiatives”.  However Bill English stated unequivocally that there will be no tax cuts announced before the election. He says there is not enough fiscal room at this stage, but does make it pretty clear they do plan some in the future, if re-elected.

I do hope there are tax cuts in the next parliamentary term. They will of course be modest. But as the Crown accounts reach surplus, the surplus should go on a mix of extra spending, tax cuts and debt repayment. It is fundamentally unbalanced to only increase expenditure. Tax cuts are the only guaranteed way to increase household incomes. It would be sensible to target the lowest and second lowest tax rates, or the thresholds they apply at.

Due to fiscal drag or bracket creep and the like, tax as a percentage of GDP will rise without tax cuts.  It is forecast to go from 26.6% to 28.4%. I’d like to see it eventually around the 25% mark.  We should fund extra spending from a growing economy, not by increasing the share we all pay in tax.

It is worth stressing that even by 2018, the surplus is only projected to be $3 billion a year. That can easily be wiped out in a downturn. We do not have the fiscal latitude to embark on huge amounts of new spending – now this year, not next year, not the year after. We can afford some modest spending and modest tax cuts within the $1.5 billion annual operating allowance. We can’t afford promises of $2 billion here, $3 billion there.

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25 Responses to “No tax cuts”

  1. skyblue (210 comments) says:

    This outlook does not take into account a Lag/Gre/IM/NZF/MP govt that we will now get on 20 Sept.
    We will be phuked as a nation then.

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  2. dime (9,972 comments) says:

    It friggen amazes me how well we do, considering how much we spend on welfare, health, education.

    Tax Cuts – politically its not ideal to cut the highest rate the most. However, i think its best for the country to have as many net tax payers as possible. If we keep cutting the lower rates, we are going to eventually run out of people who actually pay for shit.

    It will be a dam shame for this country if the coalition of shit from the far left gets in next term. imagine the damage. 1 more term of National and we will be in such a stronger place.

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  3. radvad (765 comments) says:

    Whenever the left say the rock star economy is over the obvious response is “That is another reason why we should not vote for the big spending left wing parties.”

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  4. Changeiscoming (189 comments) says:

    Again, don’t spend the surplus until we have it. – We do not have the fiscal latitude to embark on huge amounts of new spending.

    DPF you a preaching to the converted. It’s the 28 billion spenders over on the Lab/Green/NZFirst/InternetMana that need the talking too.

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  5. flash2846 (284 comments) says:

    Being responsible doesn’t win elections because dropkicks are outnumbering honest contributors. Sorry guys in my opinion bribes are called for.

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  6. m@tt (629 comments) says:

    So the ACC levies have saved the surplus.

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  7. The Bangles (49 comments) says:

    In regards to: Tax cuts are the only way to guarantee higher income. My older brother got an immediate job as an engineer, after studying engineering. Same with my youngest brother. So let’s get this straight, if we were to not fund education at all, and were to wipe out tax altogether, are you sure only tax cuts mean higher income.

    Now I’m not saying we should raise tax, no way. We pay more than enough tax, income tax, GST, petrol tax, cigarette tax, alcohol tax, rates, ETS. But what I am saying, is educational ability does affect income. And how bout profitability of kiwisaver. People get a mortgage in hope that they will own a house. If kiwisaver returns were good enough, people would actually want to save more in kiwisaver. According to Gareth Morgan half of the gross interest earned from funds goes to fees. When will they do something about this? Because you see according to Gareth Morgan, NZ has the third lowest capital intensity per person in the OECD. If your using a push mower, it’ll take you longer to cut the grass than someone who uses an electric mower.

    If all we were to do, is do something about the fees in kiwisaver, more money for an industry’s capital budget. More production, more productivity higher wages. And if we were to do that, we could definitely have more tax cuts than you can imagine. And I’m not saying the govt should fund the fees, I’m saying this issue needs to be looked at.

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  8. The Bangles (49 comments) says:

    Yes Matt, ACC has $24 billion in surplus funds. They lend this to the government. That’s why I have friends who have had accidents and ACC isn’t coming through. That’s why I’ve paid my yearly ACC every 8 months for the last two years. The money is being borrowed by the government.

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  9. rangitoto (247 comments) says:

    I have always thought that the tax thresholds should be indexed to inflation. Stops the govt getting a windfall they shouldn’t have. Government spending should also be limited to a percentaqe if GDP. 25% sounds like a good max number.

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  10. The Bangles (49 comments) says:

    Actually Rangitoto, that sounds like an excellent idea. They should get a proportion of what we earn. And no more than that. So if they’ll have education focus on science and maths, everybody will be better off. But if they have us learn silly things instead, they’ll have less. Or how bout this, when the government borrows, economists called this the crowding out effect. Because those wanting to set up businesses have to compete for funds from the government. Your idea would mean that if the government doesn’t borrow so much, they’ll have more later on.

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  11. UrbanNeocolonialist (288 comments) says:

    I think that politicians (govt and opposition) should receive a huge bonus linked to growth in average real disposable income during the terms they are in power (or perhaps there could be a basket of performance measures) – make it several times their pay. That would get all political parties and politicians working to improve the NZ economy, and would be incredibly cheap compared to the benefits it could deliver.

    Also add a component in their pension linked to long term GDP growth – so that they actually start to think and plan rationally for the country’s economic future.

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  12. burt (8,269 comments) says:

    UrbanNeocolonialist

    They do. During the last Labour government Clark got circa 9% payt rises every year, doubling her income over her term and she delivered the expected results from a Labour government – increased inequality and a recession. She got her bonus just the lovers of self serving big government were silly enough to vote for her because they had failed to notice every time we’ve had a Labour government for the last 50 years it has ended like Clark’s did in 2008.

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  13. dime (9,972 comments) says:

    UrbanNeocolonialist – they would find a way to rort the system.

    Like CEO’s who get paid on stock performance. All of a sudden, no dividends, tons of share buy backs. whatever it takes to push the stock price up no matter if its good for the company or bad.

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  14. ajchimaera (1 comment) says:

    I personally consider the single-minded fixation on tax cuts to fall short of addressing the overall issue. Tactics like slapping a new top-level bracket with a higher rate, or nipping a few percentage points off every rate, do very little to achieve their purported goal – to result in a fairer distribution of taxation amongst those of unequal income.
    It is a knotty situation, as there are many different ways to look at it. From one point of view, the absolute fairest way to perform income taxation is to have exactly the same rate for everyone – probably something around the 25-30% mark. That way everyone contributes an equal portion of their earnings to go toward the services we enjoy as a society.
    However such an implementation would severely cut into those who have the least to spare out of their household budget – hence the justification for a progressive tax system, and additional fortification such as tax credits to further ease the burden. But this starts to get messy and piecemeal rather quickly, and the evidence seems to indicate that it still doesn’t properly address the issue.
    The underlying reason for this is that there are certain necessities of life that every single household has to meet – rent/mortgage, power, water, food, transport, and telecommunications. I would estimate an average of these to be something around the $15,000 mark per year. Obviously, those on lower incomes have a far greater proportion of their incomes taken up by these necessities, while those lucky/fortunate/skilled enough to earn in the upper reaches of the tax brackets do not feel the sting nearly as much.
    As you may have guessed, what I’m wandering towards is to call for the implementation of a new bottom tax bracket, of something around the $0-15K mark, with a 0% taxation rate, to recognise that we all need the same things to get by in this society, before we think about enjoying the additional services that the public sector provides, and relieving the tax burden from the income required to meet those costs seems an excellent way to address that fact.
    However, once you go past that threshold, there is no justification for the existing tax rates to be so far apart, so I would consider something on the order of 25% being a fair rate from $15,001 -> $48,000, and then the current 30 / 33% brackets at the existing thresholds could remain the same.
    Everyone gets an effective tax cut for the same underlying reason, and it’s the people who really struggle who win the most. Surely that’s something that should be considered.

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  15. Razorlight (52 comments) says:

    The PREFU shows just how important this election is. The surplus is modest at best and will remain relatively tight (like it should).

    However if Hone, Russell Turei, Cunners and Laila are allowed to hand out the cheques the structural deficits that the last Labour government created in 2007 will return.

    That is the choice here. Lets not give up these hard fought surpluses.

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  16. polemic (460 comments) says:

    The PREFU shows how critical it is to keep stable Govt.

    Tax Cuts would help though “Bring them On” the battlers need them and Labour/Greens will increase taxes and waste the proceeds like they did previously

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  17. The Bangles (49 comments) says:

    About the government caring about the performance of the economy. We produce farm goods, and kauri, and other raw materials. Meanwhile other countries like Germany have got a big manufacturing base. To say that any previous NZ government is doing fantastic at managing the economy is absolutely fanciful. 10% of us produce things. That means 90% of us are ready to provide a service. Their is a huge, huge room for improvement. And that should be what politicians should be focused on.

    Now, out of all of the parties, at least National isn’t going to waste any money. Whereas at least the majority of the other parties will. So at the moment its really a question of who is going to waste the most or least money. Whereas what it should be about is how can we get this country moving again. And 10% of us producing things is just not good enough. I know we can do better. Oh and I also know we can do far worse, with people like David Cunliffe. And if the Greens get a big amount of votes it will be economic suicide.

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  18. publicwatchdog (2,593 comments) says:

    How about opening the books at central government level – across all Departments / Crown Owned Entities / State Owned Enterprises – and finding out exactly how much is being spent on consultants and private contractors?

    Then – if there is no ‘cost-benefit’ analysis which proves that this double layer of private sector ‘contractocracy’ is more cost- effective than in-house provision under the ‘public service’ model – then CUT OUT THE CONTRACTORS!

    Research by the USA-based Project On Government Oversight (POGO) back in 2011, at Federal Goverment level proved that contracting-out was TWICE as expensive as in-house provision.

    So – could NZ cut our central government spend in half by cutting out the contractors?

    Saving BILLION$?

    Penny Bright

    PS: How much is NZ now exposed to derivatives?

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  19. Nookin (3,341 comments) says:

    Penny, you have slated Key for years now on his involvement in the derivative market. Here is a link to a Fonterra article. It explains derivatives as a risk management tool. Any company involved in major export or import has to be able to mage its finance. It has to plan for payments or receipts well into the future. It cannot,responsibly, ignore the possibility (likelihood is probably a better word) of currency or price fluctuation.

    My questions for you are
    1. Is the use of derivatives as a risk management tool wrong and if so why?
    2. If risk management derivatives are ok, specifically what derivatives are wrong?
    3. What is the ratio of “right” to “wrong” derivatives?
    4. Give me your personal analysis to NZ’s exposure to the use of derivatives and justify your conclusions?

    http://www.fonterra.com/wps/wcm/connect/598b92ba-cea3-410d-83fe-8a98f25f3beb/4116+Risk+Management_web.pdf?MOD=AJPERES

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  20. SPC (5,619 comments) says:

    Given the modest projections for surpluses in the next term – a tax revenue cut should be ruled out.

    There should be a structural surplus when the economy is out of recession – something the previous government got right by paying down debt and building up the Cullen Find.

    National should do the same if re-elected.

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  21. The Bangles (49 comments) says:

    Penny-Public watchdog, you might be interested in some research I did. We have a thing called the SDR. SDR stands for special drawing rights. If our imports are higher than our exports by say $100 m in a day, we must pay for that with Special Drawing Rights or we must sell our land or borrow that $100 million. The special drawing rights were created by the IMF, as a replacement to the US dollar being convertible to gold.

    Now, that being the case, suppose our exchange rate is where exports of goods and services is equal to imports of goods and services. Lets also presume that China buys $1,000 million worth of our land. Currently what happens, is it raises the value of our dollar, making it harder for exporters, and cheaper for imports. But, what if we were to set it where exports and imports are equal? Then what would happen is that $1,000 million worth of our land, would mean we have $1,000 million more in Chinese currency, we could then exchange it for SDRs and this means imports and exports would stay where they are at.

    At anytime those who sold their land, could use those SDRs as international currency wherever they will. The 2nd or 5th plank of the communist manifesto says a central bank. If China creates money out of nothing, and then lends to us, or buys our land, if affects our exchange rate. And yet people call this free market. Its not, if we used gold as currency this would not be happening. So in this case, most people might see hedging and derivatives as a great idea. But to me I don’t see it as so, and that’s because I understand how a true free market works. And I know that central banking is from the communist manifesto.

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  22. The Bangles (49 comments) says:

    SPC, yes we did get the debt down. And the lower the debt is, the lower interest the taxpayer will pay. So I’m in favour of making sure we have surpluses. More debt repayments now = less interest from the taxpayer = less taxes paid in the longrun.

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  23. The Bangles (49 comments) says:

    Oh, also, if you look at the universal currency converter, and put New Zealand to the IMF’s XDR (SDR except x means electronic). You will find that the New Zealand dollar has gone stronger to the XDR. Nations around the world have inflated their currencies, have massive deficits, meanwhile New Zealand has kept it small. And that’s why the NZD is going stronger to the SDR. The SDR is based on a basket of currencies, the US dollar, the UK pound, the Euro, and the Yen.

    And Germany’s hyperinflation happened when their debt was so massive, that they couldn’t pay the interest without inflating their currency. Our debt levels are not as bad as other countries, so other countries will inflate their currencies even more than us.

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  24. Nookin (3,341 comments) says:

    I think Penny got all dizzy and fell over after your first couple of lines, Mr Bangles. She doesn’t respond to contrary viewpoints very well.

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  25. The Bangles (49 comments) says:

    lol.

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