A Budget gamble

There is much in yesterday's Budget that is political rather than logical, but that is the quandary all governments face: their greatest power is the ability to impose taxes, balanced by their duty in a democracy to use revenues for beneficial public purposes.

Thus, when the tax working group recommended (among lesser measures) a top rate of tax as low as 25%, and revenue generating options such as a capital gains tax, these were ruled out as being too hard to sell to voters, even though the great majority of average to middle income earners would have benefited.

No doubt such ideas sounded far too much like those espoused by Sir Roger Douglas in the 1980s, and now cloned into Act New Zealand policy.

Rather, the Government has opted for a range of measures which will both please and dismay its supporters because they appear to be both rewarded and punished, at the same time triggering a penalty regime designed to shift the spending of tax gains from consumption to investment.

Most people will want to know how they have been treated by these changes, and will judge the measures fair or unfair, for which there will be political consequences. The Government has gambled on these likely to be in its favour.

What really matters, though, is whether the changes will stimulate investment in jobs and in product-creating industries (without which there cannot be lasting economic growth) or simply leave New Zealanders' habitual spendthrift ways unchanged.

In essence, the Government has judged its measures to be long term: a brave and necessary conclusion. The International Monetary Fund assessed reducing income taxes and increasing consumption taxes (such as GST) would only expand the economy by 1% over five years or so.

Nor, some observers believe, will these changes much alter the way tax imposts fall on different income groups. Wealthier earners will get the greater benefit since they pay more tax as a percentage of income and spend more, thus paying a greater proportion of consumption taxes. But they can also bear the brunt with greater ease.

For the lower half of wage and salary earners, the position is much less rosy, depending on individual circumstances. Some, effectively, pay no income tax, but most have little choice in avoiding consumption taxes, proportionate to higher earners.

What needs to be taken into account, however, is the impact of the long-overdue changes to the tax treatment of both commercial and residential property investment. It has been argued that this particular boon has contributed to the excessive rise in property prices as well as the dangerously inflated gap between property prices and property rentals.

The consequences of the changes for landlords and tenants alike could be very serious in the impact on property values and the likely rebalancing of property rents - of which consequences the Government is clearly quite uncertain.

The ability of some earners to lessen their tax obligations by sheltering income in family trusts, portfolio investment entities or companies is to be restricted, which will introduce more fairness into the system, though probably at some cost to the National Party's membership support. Many property investors are middle to higher income earners.

Low and average income earners will be displeased, since the combination of tax cuts and increases in GST (as well as on dutiable goods such as tobacco) will leave their households little better off, if at all.

For very low income earners, including beneficiaries, the compensation for GST will make little real difference in net spending income.

These households find it difficult to get out of debt, have little or no savings and face continuously higher costs for basic essentials, including unavoidable services.

The effect of the tax cuts on their quality of life will be minimal - especially if, as has been predicted, retailers use the GST increase to boost their margins by raising prices.

It is very likely, too, that the measures announced yesterday will increase wage demands from workers and their representatives, given the nil or low increases during the past two recessionary years, and employers who argue the tax changes compensate for such demands will confront a substantially unconvinced audience.

There will be limited approval for the attempts to eliminate the various rorts involving the Labour government's middle-class benefit bribe - "Working for Families" - such as by those individuals who have reorganised their true income to be able to claim the benefit.

The intention to limit new government spending to $1.1 billion is wise and capping future increases to 2% a year is sensible providing departments also remain under tight control, but the state of the operating deficit remains bad and is expected to worsen, with a peak of $8.6 billion forecast for June 2011, although reaching surplus three years earlier than expected, in 2015.

Growth forecasts remain quite modest at between 2%-3% for the next few years - a forbidding indication of the difficulties the country still faces.

If the Government's true intention was to produce a Budget focused not on the usual redistribution of taxes but on greater incentives to work, save and invest in other than property, then the anticipated benefits will be keenly awaited, but they will be a long time coming.

And if they do not eventuate, what then? So much depends on the state of the world economy, especially that of New Zealand's main trading partners.

The wealthy might simply choose to shift to Australia without waiting for New Zealand to catch up to its standard of living; for those who remain, this Budget will not have them dancing in the streets.

The Government deserves commendation for - at long last - tackling a few of the seriously detrimental distortions in the taxation system; but for the rest, a mark of "achieved with credit" is some way off.

 

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