In his Budget on Thursday, Finance Minister Bill English confirmed he would defer the second and third round of tax cuts that were to take effect on April 1, 2010, and April 1, 2011.
In the current environment, this move is fiscally responsible.
The deferral of the personal tax cuts will partly preserve a tax base that is under increasing pressure.
The Government forecasts a fall of $50 billion over the next three years in the size of the New Zealand economy, compared to that forecast in Budget 2008.
The corporate tax take is forecast to drop 20% from the year ended June 30, 2008, to June 30, 2009, and the personal tax paid will drop around 4% over the same period.
Further out, that represents a massive $15 billion drop in the forecast tax take over the period 2009 to 2013 and that forecast, together with a commitment not to slash and burn public expenditure, has cemented the fate of the second and third rounds of tax cuts.
The sobering reality of the economic climate is reflected by the finance minister indicating that unless New Zealand is able to achieve growth rates magnificently greater than those forecast in the Budget, the reinstatement of the tax cuts is unlikely before the next election.
Given the Government is expecting to run deficits for more than 10 years, tax cuts now seem likely to be delayed for much longer.
Without drowning you in numbers, here are a few key points from the announcement: The Government has forecast for the year ending March 31, 2010, that our 3.3 million taxpayers will pay a total of $23.3 billion in personal tax.
About 21% of those taxpayers earn more than $50,000 per annum and those persons pay a staggering 65% of all personal income tax collected.
While only 3% of taxpayers return over $100,000 per annum, they contribute 26% to the tax take.
All taxpayers earning more than $14,000 a year will be affected.
For someone earning $30,000, the deferral means they will not receive $160 a year in tax savings.
Those earning between $50,000 and $70,000 will forgo $600 per annum.
For higher income earners, the contribution to the deteriorating economy is greater, at $1400 per annum for someone earning $150,000 a year.
Although for many this announcement may be disappointing, for all of us it cannot be unexpected.
- Richard McKnight, a partner at PricewaterhouseCoopers based in Dunedin.
