Archive for the ‘Tax cuts’ category

The economy

June 6, 2008

One of the biggest election issues this year is likely to be the economy. Over the last nine years the economy has grown strongly. In part due to good luck, with high prices for our exports, partly due to the reforms of the 1980s (the growth we saw under Labour was a continuation of a trend which started in 1991), and in part, because Labour kept the main elements of the reforms of the 1980s in place, and was very cautious dealing with the economy.

However, thanks to the global credit crunch, this has changed. Unemployment has started to rise again. We also face problems with high inflation, a official cash rate as high as 8.25%, inflation set to reach 4.7% (well above the 1-3% target range) and a slowing of economic growth to under 1% in 2009 forecast. Other bad features forecast include a doubling of unemployment to 6%, a 13% drop in house prices with the lowest level of house sales in 18 years, and a fall in the value of the New Zealand dollar. Many households in New Zealand are strugling with high food and petrol prices, the high interest rates putting pressure on their mortages, and with these projections things don’t look like they are going to be much better.

None of the above is Labours fault. Sure, Labour could have cut taxes earlier, not bought in redistributive schemes like Working for Families, and so forth. But the reality is that we live in a very globalised world, and do a lot of trade with other countries. This means that circumstances beyond our control have a big impact on our economy. There was nothing that Helen Clark could have done to stop the global credit crunch from occuring, and she is just as much the victim of bad luck now, as she benefited from good luck in the strong growth over the last nine years.

However, economic growth does not come from itself. While government policies have limited effects on growth in the short run, they can set the foundation for better conditions in the long run. But there are limits to what can be achieved. Creating a good business enviroment (low taxes, low levels of regulations, little corruption and stable macroeconomic conditions) as well as investing in infrastructure needed and resources (the most important economic resource is of course people, who need good educations to preform well in a high skill based economy), are the main things. Obviously economic growth needs to be balanced against other concerns like looking after the poor and the enviroment. However, economic growth will make these tasks a lot easier (and basically any other task in government). The reality is that you can not afford to spend much money on social welfare, on health, or education, or fighting climate change, with a failed economy. That is why improving the economy should be central to every Parties plan for New Zealand’s future.

I am not an economic expert (I only took 2 first year papers and one second year paper at university on economics) but I do know the basics. A good plan to improve the New Zealand economy (long term) will consist of:
*Creating a low and flatter tax system, with the abolition of redistributive tax rebates (such as working for families).
*Investing heavily in education, transport and communication networks.
*Reviewing, with the aim of reducing red tape, the Resource Management Act, and all other bureacratic regulations.
*Mantaining the independence of the reserve bank.
*Create competitive markets where state monopolies exist, such as ACC.
*Aim to sign free trade agreements with more countries like the United States.
*Aim to keep markets as flexible as possible, so they can easily adjust to changing market conditions.

In the short run, make progress on all the above. But mantain medium governemnt surpluses (funding tax cuts through cuts in spending) to give the government flexibility, and avoid putting more pressure on inflation and/or overheating the economy, and try not to let interest rates fall too soon or fast (high interest rates are good for punishing people who live beyond their means. On the other hand, in keeping our dollar high, they hurt our exporters).

Enough on my ideas. Back to the real world. The great worry facing the economy is that we could be looking at stagflation in the worst case scenario. In any case, with high inflation and a high OCR, Keynesian style fiscal stimulation is not what the economy needs now, and as Bernard Hickey blogs, the 2008 budget could do more harm than good. Sadly, with this election likely to be a bribe war between Labour and National (like the last), things aren’t going to improve anytime soon.

Onto the political implications. No doubt the tax cuts in the budget were one massive election bribe. The New Zealand public is demanding them to help them in their financial distress. Sadly, although they could help long term, they are not the answer. The risk is that if New Zealanders go and spend all their extra tax cut money, it will push inflation up, the OCR up, the dollar up (huting exporters) and eventually cause a recession. Even if this doesn’t happen, the improvement to peoples financial circumstances from tax cuts will not be overwhelming, and quickly eaten up by rising petrol and other (perhaps more food) price increases. The key to improving peoples wellbeing in the long term is not a one-off tax cut, but long term wage increases driven by growth in productivity.

I don’t see much of this message from National. Instead, don’t be the least bit surprised if they use tax cuts as a massive election bribe to buy their way into office, like they tried to do last election. The political risk for National is that they will get voted into office now with people thiniking about how they will spend all their new cash, with inflation eating it up almost as soon as they get it. At the same time, all the predicted forecasts (higher unemployment, inflation, low growth e.t.c come to pass). People quickly forget about the tax cuts, blame National for the economic downturn, and return Labour in 2011. There is no doubt that Bill English will have his work cut out for him, with the bad shape the economy is in.

I strongly believe that reruning the 2005 campaign of using tax cuts as an election bribe, while it may work this election (a big if), will hurt National in the long term. Instead National should talk down its tax cuts, promising they will be modest, and not to expect too much from them. When they do come out, they should be identical to Labours, with a few minor alterations to the top tax brackets, like removing the 39% rate, cutting the company tax rate and only minor adjustments above Labours promises to the lower thresholds. They should not be sold as a bribe, but as part of a wider package at lifting New Zealand’s economic growth. A emphasis should be made that we are facing tougher times, and the higher petrol and food prices are here to stay. Nationals first budget should keep with this scheme, think long term, and be a real chance for National to stamp its mark upon the economy. And should include spending cuts, and the clear message that we must be prudent with our finances to help us through the tough times. Above all, national should avoid blaming Labour for the bad economic conditions (as things will not miraclously improve once National takes office). Sadly, I will be most surprised if my approach is taken.

Ultimately, time will tell what happens to the economy, and what National does. I really hope for the best, especially for those low income families struggling under the conditions, but fear the worst.

New petrol tax for Auckland

March 19, 2008

The Auckland regional council has just imposed a 5 cent per litre petrol tax to help pay for upgrading of its transport network. I support them in doing so. They have been given the powers to do so under the 2007 budget, and legislation being rushed through Parliament.

When will the new Bill Labour is passing take effect? 1 January. Just after the election. Coincidence?

The deficit

March 18, 2008

It turns out the $400 000 000 deficit is actually a $600 000 000 surplus. So there is (some) money for tax cuts after all. Actually, I didn’t look that much into the deficit anyway, regarding it, like the low surplus now, as a temporary thing due to the recent US economic problems. None the less, the fact the surplus is now only $200 000 000 instead of the billions means any tax cuts will be very small.

It also raises the question of where the surplus has gone. No doubt much of it has gone into Labours irresponsible working for families and interest free student loan bribes, along with runaway spending elsewhere. One interesting thing to note from the 2007 budget was its inclusion of $10.3 billion in contingencies for new expenditure. No doubt we will find out more detail of where this unallocated sending will go now that it is election year (hint: election bribes).

For those interested in tax cuts, don’t get despondant about the surplus at only $200 000 000. The real surplus (OBEGAL), not the cash surplus (OBEGAL doesn’t count investment in assets as expenditure, which would be counted as expenditure in the cash surplus) was 3.1 billion, but with this error corrected is now 3.8 billion. Actually slightly ahead of forcast. So there is still money avaliable. And that $10.3 billion in contingencies can be forgotten about. If your brave enough to cut spending you might be able to afford something decent.

However, not everything is good. The economy is projected to grow at only 2% per year over the next three years, and with our population growing at 1.5% average per year between the 2001 census and the 2006 one, our per capita growth will probably be around 0.5%. This is bad, as when the economy grows, the government gets more tax revenue (e.g. more people spending more money, more GST, as well as more jobs (more income tax) and less people on benefits) creating room for tax cuts (which can lead to more growth causing an upward spiral) and better public services. And 2% growth could be good news. There is talk of a possible recession.

Translation: There may be money for tax cuts now, but may not be in future.

Kiwi Party policy

March 4, 2008

The Kiwi Party (the new name for the former Future Party, which broke away from United Future after the anti-smacking bill with Gordon Copeland and Larry Baldock, has unveiled its tax policy (the first party this election, to the best of my knowledge to do so). Here are the key elements of it:

Income splitting for families with dependent children. This policy would allow a family with a father earning $76 000 per year, and stay at home mum raising children, to have the income split equally. This means instead of being taxed at 19.5% on the first $38 000 of income, the next $22 000 is taxed at 33% and the last $16 000 is taxed at 39% (total tax paid is $20 910), they will be able to have their income split in two, at $38 000 each, meaning it will all be taxed at 19.5%, reducing the total tax paid to $14 820. This is quite nice policy that will help families.

$100 of income tax goes to a charity of your choice. Nice aid to charity, but it should be up to you, not the government to decide how you spend your money. Should spend the money cutting taxes elsewhere and give new Zealanders the choice of whether or not to give it to charity.

Adjust tax thresholds for inflation. It promises to backdate this policy to 2002 by increasing the 19.5%/33% threshold from $38 000 to $46 000, and raising the 33%/39% threshold from $60 000 to $73 000. Good move.

Artificially increase wages by increasing the minimum wage to $15 per hour. Oppose. The minimum wage was $9.50 pre 2005, and as part of Labours coalition confidence and supply agreement with NZ First it was raised to $12 per hour, a high level. Although the wage increase is tax deductible, Peter McCaffrey has a good deal to say about how it might actually stop further wage increases.

Health insurance premiums to be tax deductable. Good move. Ease pressure on the state health system, encourage health insurance and reduce taxes.

GST off rates (about time) and a proportion of GST to go to local government. This will reduce the ever increasing rates bills many New Zealanders face. Good policy.

Overall sensible policy, though the increase in thresholds to $73 000 and $46 000 is too timid with bigger cuts needed, and I have strong reservations about the minimum wage part. Sadly, as the Kiwi Party is not registering in the polls, and will struggle to get 0.5%, yet alone 5%, these policies won’t be implemented. Hopefully might give National some ideas.

Tax cuts coming in the distant future, if then

July 3, 2007

Labour have again promised to cut taxes,only that we will have to wait until 2012 and give them a forth and fifth term first. My response is this: You promised to adjust tax thresholds in 2008 if reelected, but cancelled that promise. We can’t trust you again. you haven’t spelt out the details for one reason, no matter what they are they are going to be very small. there is one way to get tax cuts though: Vote Labour Out. It could be a good slogan for a tui billboard; Vote Labour and we’ll give you tax cuts in 2012: Yeah right.

Vote Labour if you want to pay more taxes

June 23, 2007

Trevor Mallard has just suggested that there should be tax cuts in the 2008 budget. It wouldn’t suprise me if there is, as Labour would probably have learnt a few lessons fron 2005.
new zealanders would have to be very stupid not to see how hollow any tax cut promises from Labour are though. Labours record in office is to put up a large number of taxes, and has consistently refused to reduce them. Further, given Dr Cullens cancelling of the ‘chewing gum” tax cuts in the last budget, Labour can not be trusted to keep election promises. further, during the last 5 years, total direct taxation increased by an astonishing 54%. Taxation per capita (govt tax revenue divided by population) has increased from $9 449.93 in 2001 to $12 690.09 in 2006. If Labour promises or gives tax cuts in 2008 a good slogan for a Tui bilboard would be “Labour wants to cut taxes: yeah right”.

Budget popular, but so are tax cuts.

May 18, 2007

Sharpenz has just done a poll of 629 people on their thoughts on the budget.¬† 64% of New Zealanders¬†support the cut in the company tax rate, with 10% opposed.¬† 77% agree with tax credits going to Kwisaver, with 11% disagreeing. 60% agree with employers being required to put money into their employees kiwisaver account, with 25% opposed. However only 39% of peopel support the new regional petrol taxes, with 47% opposed. 53% of people say they will probably use Kiwisaver, with 37% saying they probavly won’t.

However tax cuts remain popular. 50% of voters would prefer the money spent on Kiwisaver to give them a tax cut now. When asked if they wanted a tax cut if it would cause intrest rates to rise, 32% said yes, 38% want one delayed and 25% opposed to any new tax cuts.

In conclusion, while most people don’t have a negative attitude towards the budget, public demand for tax cuts is still strong.