“New Zealand’s economic outlook is positive. Treasury is forecasting real GDP growth of around 2.9 per cent over the coming year, and 2.8 per cent on average over the five years to June 2020. Over 200,000 more people are in work now than three years ago, and another 170,000 new jobs are expected by 2020. Over that period, the unemployment rate is expected to drop to 4.6 per cent and the average wage is forecast to rise to $63,000 a year. Only a handful of developed economies enjoy such a positive outlook.”
– Minister of Finance Hon Bill English, Budget Speech 2016.
On the surface, National’s eighth Budget looks sensible. It shows a small surplus, a plan to reduce debt, an increase in spending to address the pressure on social services due to record migration, and on-going investment in infrastructure and innovation.
In particular, this year’s projected $668 million surplus is expected to grow to $2.5 billion next year, rising to $5 billion in 2019, and $6.7 billion in 2020.
These stronger cash surpluses will allow the Government to pay down debt, which is forecast to peak at 25.6 percent of Gross Domestic Product (GDP) next year, falling to 19.3 percent by 2020. At that stage, contributions to the New Zealand Superannuation Fund are expected to resume, two years earlier than previously forecast.
In 2013, Finance Minister Bill English explained that his long term goal was to lower government spending to 25 percent of GDP. Budget 2016 confirms that he is on track, with core Crown expenditure reducing from a peak of 34.1 percent in 2011, to 29.7 percent this year, and 28.3 percent by 2020.
This reduction in spending is being driven in part by Bill English’s commitment to improving the performance of the public sector, which, excluding transfers, makes up a quarter of the economy. By adopting an “investment approach”, funding is prioritised into those areas that will deliver the most effective returns. Using data around lifetime liability and the public sector’s ten key result areas, the Minister wants government services to become more measurable and efficient in the years ahead.
However, while the Budget shows that progress is being made in improving New Zealand’s overall economic outlook, some key indicators signal that the future is not all rosy.
In particular, Treasury’s projections show that while economic growth is forecast to strengthen from 2.6 percent this year, to peak at a respectable 3.2 percent in two years time – driven by strong population growth, low interest rates, and increases in exports and tourism – growth is then expected to decline by 2020 to 2.5 percent, which is even less than it is now.
Further, while net migration inflows are predicted to peak at 70,700 in the year to June, within two years the numbers are expected to fall back to the long-term level of around 12,000 per year, as the Australian economy improves and attracts New Zealanders back across the Tasman.
In their Budget documents, Treasury explains that since our population is rising at its fastest pace in over 40 years, to employ this growing population and maintain incomes, our economy needs to keep expanding. That means an improvement in ‘productivity’.
Broadly speaking, productivity is a measure of the output of workers. To raise a country’s productivity, more value needs to be generated for each hour that is worked. Since worker incomes are linked to productivity, the more productive a work force is the greater the capacity for wages to increase. That’s why productivity is the key driver of higher living standards and a better quality of life.
According to Treasury, New Zealand’s growth in labour productivity to 2020 is projected to average just one percent a year. This is below our historical average of 1.2 percent over the 20 years from 1995 to 2015. They explain that this is caused by our growth being driven mainly by firms in labour-intensive industries such as construction, retail, and tourism, which traditionally have relatively low levels of productivity.
This week’s NZCPR Guest Commentator Dr Don Brash, the former Governor of the Reserve Bank, has examined the Budget and picks up on this issue:
“Much more seriously, though not surprisingly given that this Budget was the Government’s eighth and big changes in policy don’t happen in a third term government, there was not the slightest attempt to deal with our very slow growth in per capita incomes. Yes, aggregate growth looks reasonable, but that is very largely the result of very strong growth in population, in turn the result of a high rate of net immigration, not an increase in productivity. And it is increased productivity which ultimately drives increases in incomes.
“Brian Fallow pointed out in the New Zealand Herald on the day after the Budget was delivered that ‘last year economic output grew 2.3 per cent but that was almost entirely explained by a 2.1 per cent rise in hours worked.’ He noted that in the 1990s ‘labour productivity grew at a brisk average pace of 2.6 per cent a year. Between 2000 and 2007 it fell to 1.3 per cent and since 2008 it has averaged 0.8 per cent.’ He went on to point out that this ‘feeble growth in productivity is off a low base by international standards. In Australia, for example, they produce one-third more per person than we do, despite our working 8 per cent longer hours on average.’
“And of course that very slow growth in output per hour worked is the fundamental reason why, despite reasonable aggregate economic growth, our real incomes are growing very slowly, and the gap between incomes in New Zealand and those in Australia – which the Government claimed they wanted to close by 2025 – has barely changed over the last eight years.”
While the Government has been heralding the fact that for the first time since the early nineties the exodus of New Zealanders to Australia has been reversed, as tens of thousands of Kiwis return home, Treasury’s forecasts show that this situation is not expected to last.
So what is it that the Australian Government is doing that will cause that country to again become a magnet to entrepreneurial Kiwis?
Firstly, the major difference between our two countries is, of course, our levels of wealth. According to the OECD, in 2015 Australians enjoyed a GDP per capita of $65,300, which was 32 percent higher than New Zealand’s $49,400. That makes Australians almost a third richer than New Zealanders.
And secondly, part of the answer almost certainly lies in tax. Australia already has a tax advantage over New Zealand, with the latest figures from the Heritage Foundation finding that in 2016, Australians paid only 27.5 percent of GDP in tax, while New Zealanders paid 32.1 percent, giving our country a heavier tax burden than most of our trading partners.
In their recent budget, the Australian Government announced across-the-board tax cuts, to reduce both income tax and company tax. The tax threshold on middle-income earners was lifted, a levy on high income earners was dropped, small business taxes were cut to 27.5 percent, and company tax will be lowered to 25 percent over the next ten years.
Clearly, the Australian Government puts great faith in the incentive effects of lower taxes to encourage work, employment, investment, innovation, immigration, and savings.
While he was Leader of the Opposition, Prime Minister John Key, also promoted the incentive value of tax cuts:
“This is the message to New Zealanders: under National, tax cuts are a priority—under National, personal tax cuts are a priority. Most of all, our tax cuts will not just be about putting dollars into the pockets of hard-working New Zealanders. They will actually be about delivering the right incentives in the economy. Tax cuts let New Zealanders get ahead in their lives. They encourage New Zealanders to work hard, to get extra responsibilities, to save, and to get further education. We believe in tax cuts, we believe in the power of tax cuts, and we will deliver them.”
Once elected, however, that thinking changed, and planned tax cuts were deferred in favour of higher government spending.
National also went into the 2014 election promising tax cuts – and they were specific about the date: “Income taxes would begin to fall from April 2017”.
Last year’s Budget Policy Statement confirmed this intention, reiterating that the Government’s fiscal priorities include “Beginning to reduce income taxes from 2017 with a focus on low and middle-income earners”.
However, their rhetoric has again changed through the addition of a proviso in the 2016 Budget Policy statement: “If economic and fiscal conditions allow, beginning to reduce income taxes from Budget 2017”.
The Prime Minister has justified this by explaining that the money set aside from this budget to help fund next year’s tax cuts has instead been used for social spending. While high migration rates have undoubtedly put pressure on health and education in particular, there remains a nagging question about whether the extra funding needed could have been found through cuts to wasteful spending.
The problem for taxpayers is that while governments traditionally use their budgets to fund essential services, they also use them for political purposes, to secure vested interest support in an MMP environment – as the post-budget gloating by National’s coalition support partner, the Maori Party, demonstrated only too clearly.
At their behest, National has poured another $40 million into Whanau Ora, taking their funding up to $72 million a year – despite the Auditor General reporting last year that not only was a third of the money being eaten up by administration, but that the objectives were so vague that it was impossible to determine how well the funding was being spent.
In addition, another $34 million was given to support the Maori language, $10 million for Maori Television, $14 million for a Maori Housing Network, $14 million for a Maori Land Service, $4 million to commemorate the Maori Land Wars – including education-related activities for schools – and $1.9 million a year for kapa haka. This takes the total value of race-based funding in the Maori Development Vote to $295 million a year – a 70 percent increase since National became the Government and wanted to keep the Maori Party happy!
In a 2005 report about New Zealand, the OECD said, “Of course, no government can make productivity growth happen; the best it can do is to identify and remove obstacles to growth and provide an economic environment in which firms and individuals can flourish.”
That means the Government should be focussed on ensuring the business environment is conducive to growth, not only to encourage Kiwi firms to invest and expand, but also, to convince entrepreneurs arriving in New Zealand to stay and use their talents and skills to grow our economy, instead of leaving and boosting someone else’s.
As well as cutting red tape and bureaucracy, it also means the Government should be pushing ahead with the fundamental reform of the Resource Management Act to require Councils to weigh up the economic benefits of a project, as well as the environmental effects, when considering resource consent applications.
It also means they should be lowering taxes to send a strong signal that success and hard work are valued in New Zealand. However, rather than cutting taxes, Budget 2016 effectively raises them by removing the two-for-one subsidies in the Emissions Trading Scheme.
Ultimately, a country is only as successful as its people. While the economy is now going in the right direction, more needs to be done to lift productivity and boost growth, to ensure that those who have come to New Zealand with skills and ideas will want to stay. While lowering the country’s tax burden is not, of course, the only variable that contributes to a vibrant economy, it would nevertheless incentivise productivity and innovation, the benefits of which would flow through to all New Zealanders through rising living standards. Given that Treasury’s forecasts show that migration growth is expected to reverse within a year or two, there is no time to lose.
THIS WEEK’S POLL ASKS:
In general, what priority would you give tax cuts in Budget 2017 – a high priority, a medium priority, or a low priority?
*Poll comments are posted below.
*All NZCPR poll results can be seen in the Archive.
THIS WEEK’S POLL COMMENTS
| Tax cuts for low income – yes. tax cuts for high income – no even increase for them. | Colin |
| There are so many other things that our money could be spent on. | Dave |
| Is it possible to estimate just what unneeded health and safety regulations cost so far as productivity is concerned – as having spent my working life in construction I am appalled at so much needless, unproductive time spent. | Maurice |
| As long as we get value for money, why reduce taxes? | Peter |
| Low— because , due to our foreign debt burden, we cannot afford to cut taxes too much. Besides , this tax cutting business is in essence nothing but a vote catching device. Consider that Govt has borrowed money to make tax cuts possible in their first term and continued to borrow after. This in itself is a rather questionable way considering that – on the other hand– we are spending 1,2 billion per annum for Corrections and in excess of 275 million on Maori issues alone— to give two examples. This money, is desperately needed somewhere else. I am at a loss why a National budget is presented without listing a proper balance between exsisting debt and current borrowings versus actual cash made available from taxation and then draw realistic conclusions how much money is actually there to spend. And I am sure that there really is no money left for any tax cuts. | Michael |
| The middle tax earner need a relief on high taxation. | Wayne |
| As we all know if they give us tax cuts the money will have to come from somewhere else, so unless this Govt is going to stop all bogus payments to racist maori, (and we all know that isn’t going to happen) the tax payer will have to foot the bill as usual. so it’s a no win situation if you are the humble tax payer. They giveth with one hand and taketh away with the other. | Stevo |
| We don’t need a tax cut what we do need is a total restructure of the tax system. What is the point of taking from one hand to give to the other (after clipping the ticket on the way through). We need to leave more cash in the hands of the people in the first place and get rid of the likes of working for families. A flat rate of tax must come and the lower the better. And yes the wealthy DO PAY MORE with a flat rate 20% of one million is a lot more than 20% one hundred thousand. | Robin |
| Tax cuts are needed for the working class people, but then whoever we are we need to live within our means also. | Kelvin |
| As usual too much Budget money given to the Maori party so the rest of middle New Zealand miss out on things like tax cuts. Atrocious racism National Party. | Monica |
| A High priority as long as the emphasis is on lowering company tax. | Ronmac |
| With low worker productivity and poor returns on dairy products we just do not have the spare cash to grant tax cuts. Keep tax at the present level and cut wasteful Government spending to the bone and we will have a surplus that must be spent on reducing our national debt. | Ernest |
| Prefer NO priority. | Max |
| Long overdue!!! | Gordon |
| Stop paying out to Maori as we are all New Zealanders. | Ross |
| WHILE IT IS ESSENTIAL THAT TAXES ARE REDUCED THE CURRENT PRIORITY MUST BE REDUCING DEBT. | AUNTY PODES |
| Tax is a fancy name for theft, and while we don’t mind paying some, the tax rates GST council rates ( more theft) car reg etc etc is overwhelming. I work hard for my money and then the thieving IRD just take it. | Derejk |
| Pay down debt is the priority! | David |
| However, a quid pro quo would be to review all registered charities, to ensure that some (such as iwi organisations or religion-based commercial enterprises) aren’t dodging their tax liabilities by ‘working the system’. | Graham |
| If the Government wishes to keep faith and credability with voters they need to give a High Priority to Tax Cuts. | Laurel |
| We need to be putting money into the Defence area, infrastructure – national rail improvements, as well as Auckland transport issues. | Lionel |
| Tax cuts a high priority along with corresponding government spending cuts to do the job properly. Systematically abolish minimum wage laws and watch this country take off to prosperity! | Don |
| Why fix something that ain’t broke. | Warren |
| A major obstacle in improving productivity is the ever expanding beaurocrasy at both local and central government who place obstacles in increasing productivity. What does the 2000 odd “policy analysts” contribute? | Peter |
| Imperative. | Bryan |
| Not before time. | Barry |
| Stop RACIST AVARICIOUS MOARI stealing more money and give it back to the people who ACTUALLY WORK for their wages. SLASH government spending – sweeping salary cuts for public servants; sweeping cuts to benefits (excluding the pension); sweeping cuts to standard of living in prison (it is supposed to be a punishment); MPs paid the average wage or they fund EVERYTHING (parliamentary-hangers-on, electorate office, travel, phone, transport, food, accommodation et al). ERADICATE list MPs. Pretty simple really. | Mark |
| People really need to have more money in their pockets. | Christine |
| I’d even say it should be the highest priority to reduct taxes and incentivise productivity. | Rob |
| Must have a real vote getter. | Jim |
| Lower taxes for the workers, so they spend more and give them an incentive to work harder and the extra spending puts more tax money into the government coffers. | Theodorus |
| Perhaps a little less money fueling the Maori gravy train could cover a modest tax cut. | Jon |
| Individual spending usually better than Govt spending, apart from essential social expenses. | Stewart |
| What goes around comes around and tax cuts will drive productivity and cash flow in one hit. | Paul |
| Tax cuts serve two simple purposes. (1) They effectively deliver a pay rise, (2) They encourage personal responsibility by reducing government spending, which conversely may eat up part of the extra income derived from tax cuts. | Peter |
| Corporate & low incomes need to be taxed less. Mega incomes need to be taxed more. | Doug |
| M.Ps getting backdated wage rises is contradictory to the economical situation and just widens the wealth gap. | Edward |
| Tax cuts sound good but have to be made up some where else. | Russell |
| A promise is a promise. | Mick |
| Low income earners need a break. | Kevin |
| The real thing is reflected in what this Government does with the collected tax. When someone receives something for nothing IT has no value – and we see the effects everywhere! OOPS – politicians don’t want to see this! | Stuart |
| Repayment of debt should be the top priority of this Government having regard to the amount of borrowing since 2008 which was necessary following the GFC. | Pat |
| Health,welfare & education are of far greater importance. Any tax cuts would-I think-benefit the already wealthy. | Isabel |
| This is a must for next year. | Geoff |
| A high priority particularly for superanuitants who have already payed more than their fair share. | Peter |
| We need the money to reduce the high debit the country is in. | Carroll |
| Reduce Debt so we are ready for the next earthquake or disaster. | Ray |
| Nearly all of us have an affluent lifestyle. Inflation is low as are interest rates and expected to stay low. We do not need tax cuts, spend the money on more urgent things like social housing, “Really” low cost houses and welfare. Much better value for the money. | Alan |
| The government is playing it safe and giving to the Maori to hold onto power. | Lance |
| If the current administration decides to give tax cuts, the ones to benefit most will be, as usual, the fat cats at the top of the food chain. Frankly, I don’t think that the country can afford across the board tax cuts at present. If money is available for what will be nothing more than election year bribery, it should be targeted where it will do the most good – towards housing and serious social issues. | Les |
| This week’s article advises us that the growth in labour productivity is only 1% and the reason for that is the low productivity in the construction, retail and tourism sectors. A significant drop in receipts for dairy products has not filled the governments coffers to expectations. So, in an endeavour to maintain a small surplus it is only fair not to give tax cuts a high priority. | Dennis |
| Money could be better spent on housing, police, and debt repayment. | Roy |
| Depends on a number of factors including fiscal prudence, the needs of particular sectors of the economy in allocating of tax incentives, how effective the government has been in encouraging and rewarding true productivity (not simply investment in property) etc. | David |
| We as a country have at last worked our way to a fiscal surplus after the extravagances of the last Labour Government. Tax cuts should be a low priority as there are more important needs in the form of debt repayment, medical care and education. Cuts may be possible if savings were made in the huge wasteful Treaty settlements which have gone way past their original plan and the vast sums donated to Maori groups wasteful gimme games which remain untracked and diverted to fanciful wish lists of their devious leaders. | Chris |
| We do have to compete with Aussie on this front. | Andrew |
| For years it has been promises, promises hard to believe it will ever happen. | Barry |
| Health, education and law and order more important. | Bruce |
| Flat tax would be good. But just lowering the tax rate will be better for every worker. | Graeme |
| How can we? As at 10.42am, June 4, our national debt stood at $117,305,300,000 and climbing. The interest on that stands at $5,583,000.000 per annum. Debt per person stands at @25.231.. What will happen to us if the US dollar collapses,, as experts predict it till? The interest alone will do wonders for New Zealand. Simply type in New Zealand”s national debt and see for yourself. | Kevan |
| I would like to see any wage rises to MP’s are not back-dated out-of-sight. In view of the difficulty many are suffering in survival any back-dating is a kick in the guts for those at the bottom of the heap. | John |
| A question with only one answer!!!! | Ian |
| We need tax increase to provide better infrastructure. | David |
| With so many people with health problems the money would be better spent on helping them. | Athol |
| Our present taxation rates are a disincentive to saving, meeting housing (mortgage) costs, and planning for a fiscally viable future for most families. There surely must be modifications that can be made to incentivise the accurate returns of income and reduce the so called “cash economy”? It is well recognised that there are two rates of charges for jobs these days, surely? With or without GST, for a start! On paper or not, for a second, folding stuff helps to keep some prices down, we all know that. So if tax obligations were to be met across the board, including by companies which are allegedly overseas based, that would be a believable beginning, wouldn’t it? RE-scale the whole tax -plan, and see what it brings in? Might be a nice surprise? | Mabel |
| Better to pay off debt. | Alan |
| If tax reductions are a driver of increased productivity, then they should be given high priority. Pouring money into race-based schemes is simply political expediency, but doesn’t grow productivity. The very much minority Maori Party is getting more than its share of the vote. | Laurence |
| The country is in too much debt to have tax cuts, what is needed is for corporations to pay their fair share of tax. | Carolyn |
| Can’t provide Schools, Hospitals, low cost state housing, infrastructure etc for the people with inadequate tax income. Money don’t grow on trees. Obviously can’t keep cutting taxes and continue to provide above infrastructure no matter which party is in power. | Donald |
| Reducing taxes boosts economic growth and automatically ends up increasing the tax take anyway from increased business activity and we all prosper. | Russel |
| Tax cuts should be a high priority it is known fact that you cant tax economies into prosperity, New Zealanders pay far to much tax and when you add it to the local body rates we certainly pay too much. | Les |
| Just spend our money were it should go. Not on flags or Maori bull shit. I don’t want a tax cut. But used our money in the right way for the right things. | Robert |
| Cut Govt. wasteful spending and debt first. | Ian |
| A tax cut would not in any way buy my vote. The tax pool is part of the problem, remove it & societies parasites would be removed with it. I will never support a government that is prepared to implement a form of apartied for political expediency, in fact for any reason. | Tracy |
| Because it is really only a vote catcher. There are far more important matters that should be included in the budget eg reducing drastically the amounts handed out to Maori for separate housing, social services etc etc. Are they no longer considered to be an integral part of the NZ population. If they are they should be included in with funding for the rest of the population. These handouts are racially based and separatists.. However if the government are giving to one group they should also give separate handouts to Asians, Pacifica people Indians etc, etc. | Rog |
| I vote for high priority given I’m now retired and living on Super and Banks 3.5% return on investments minus tax. The other alternative is give to the kids to pay off their bank loans. | Ash |
| For raising productivity, saving for investment should be a priority over freely consumable tax reductions. | Jens |
| This government would be the worst national government we have ever had. More left leaning than CLARK govt. And have taken us down a dangerous separatist racist path. Disgusting will not be voting for Shonkey this time. | Greg |
| I was shocked at the amount of race related gifts made in the budget, there’s a fair amount of your tax cuts there for a start. | Graeme |
| We must incentivise productivity. | John |
| Just look at Singapore to see the value of low taxes, small government and tough laws. They will be the richest country in the world by 2030 while will continue to drift down the scale of OECD list of rich countries because too many Kiwis are not prepared to work for what they want but just expect the government to hand it to them on a plate. | Colin |
| With interest rates dropping to record low levels, the incentive to save reduces. This needs to be at least balanced with tax cuts. Does the government really want us to save, or to spend? | Brentleigh |
| The highest priority must surely be retiring debt. World debt clocks are out of control, and New Zealand is rapidly joining that madness. | Folkert |
| Reduction of NZ’s debt must always be of leading concern for whomsoever governs. ChCh’s earthquake has had its influence and there’s ever the possibility of a similar happening. Wherever possible, responsible, non-leftist governments should apply taxes as low as possible. | Jim |
| I give tax cuts a high priority but only on the basis of the elimination of wasteful race based unproductive expenditure such as the kia ora increases. The cost of appeasement is far too high for the perceived benefits achieved! | Alan |
| During the good years before the recent recession, Muriel was advocating tax cut giveaways the country didn’t need. Thankfully, Helen Clark’s government didn’t listen to her and pursued a path of fiscal stability instead. Granted, I wouldn’t mind tax cuts funded by getting rid of Maori grievance funding, but I would value a surplus more than I value tax cuts. Also, whilst I am concerned about productivity growth, I think there are better ways to pursue it than tax cuts. For instance, New Zealand needs to pursue high-value economic activities, say engineering rather than agriculture and tourism. Let’s not uselessly blow the country’s hard-won stability on tax cuts it doesn’t need. | Graeme |
| A high priority – National should have been lowering the tax burden on the country every year. They have been sitting on their hands for far too long. | Kelvin |
| Lower taxes are the key to growth. National needs to flatten taxes to the point where it is impossible for Labour to put them up again! | John |
| Without a doubt, taxes should be lowered as a priority. | Michael |
| It’s a funny thing that John Key prides himself with keeping his promises, yet when it comes to tax cuts he feels he can stuff people around. | Brenda |
| Yes, yes, yes – we need low flat taxes in this country as the best way to give New Zealand a competitive edge. | Dennis |