Have your say: Bill English signals tax reform to tilt economy away from property to exporting

Finance Minister Bill English has previewed tax reforms likely in Budget 2010 due on May 20, including a push to tilt the economy away from property investment and towards exports. He didn't give too many details, but did appear to confirm the move to impose a GST, to cut income tax and to change tax arrangements for property investors. Here is the section below in his speech today to the Wellington Chamber of Commerce previewing the budget.

Our decisions about tax changes will be announced in the Budget – and I won’t pre-empt them today. But I can say there is a compelling case to rebalance our tax system to support our goal of tilting the economy towards savings, investment and exports and away from borrowing, consumption and investment housing. Taxation has a pervasive influence on both the economy at large and on decisions made by individuals. Remember: we have an economy where we’re spending more than we earn. Tax is one way to change people’s choices and help turn that around. So any tax changes need to contribute to a better-performing economy, more jobs and higher incomes for families. The starting point for the Government is that lower personal taxes across the board are a good thing because they give people incentives to work hard, improve their skills and get ahead here in New Zealand. We have this opportunity at a time when many other countries will be forced to increase taxes. This is an important competitive advantage for New Zealand. But this will not be a lolly scramble. We simply cannot afford one. Our tax package will be broadly cost neutral, with a focus on fairness. We are committed to protecting the most vulnerable, while improving New Zealand’s long-term prospects. The Prime Minister has said that any tax switch involving cutting personal taxes across the board and raising GST to 15 per cent would leave the vast bulk of New Zealanders better off. That will definitely be the case. Any increase in GST would be accompanied by immediate compensation for low and middle income earners, beneficiaries, superannuitants and people receiving Working for Families. Additional regular adjustments for other ongoing inflationary pressures would be provided as usual. As I mentioned in Parliament yesterday - Statistics New Zealand has independently calculated that increasing GST to 15 per cent would increase the price of goods and services subject to GST by 2.22 per cent. A product priced at $100 excluding GST currently sells for $112.50. If GST were increased to 15 per cent, that product would sell for $115 – an increase of 2.22 per cent – not the 2.5 per cent some commentators have assumed. Secondly, Statistics New Zealand has also confirmed that an increase GST to 15 per cent would raise overall consumer inflation, as measured by the basket of goods in the CPI, by 2.02 per cent. This is because several consumer items, such as housing rentals, mortgage payments and school donations – which together make up about a tenth of the consumers price index - are not subject to GST. It’s also important to remember that actual CPI inflation in nine of the past 10 years has been higher than the inflationary impact of the GST increase the Government is considering. In addition, under the tax package being considered, superannuitants and people on lower wages would also receive income tax cuts. As we’ve said, we are looking at income tax cuts across the board, not just for people on the top marginal rate. So it will be important on Budget Day to look at the tax package as a whole, rather than individual components in isolation.

In the three years before the Lehman collapse in late 2008, the economy grew by less than 1 per cent a year. This was less than half our trading partner average, and less than one-third of Australia’s growth rate. During this time, the growth we did see came from all the wrong places. Output from exporters and import-competing industries, often termed the tradeables part of the economy, is now about 12 per cent smaller than in 2005. So we’ve had five years of severe export recession. In fact, overall the tradeables sector has not grown at all since 2002 – and in that time Government spending has accelerated and New Zealand’s indebtedness to the rest of the world has grown significantly. New Zealand’s habit of spending more than it earns has accelerated in the past five years. New Zealand’s total external debt has ballooned from $130 billion to about $170 billion over this period. This is forecast to approach $250 billion by 2014. Government debt by global standards is relatively low, but increasing sharply. On the other hand, private sector debt is much higher. As a country, we must finance that debt on world markets, when other countries are also borrowing heavily and global financial markets remain fragile and far from stable. For New Zealand, that is a significant vulnerability. Our other vulnerability is our lop-sided and under-performing economy. Government spending has ballooned, growing 50% in the five years to 2009, more than twice the nominal economic growth. As the tide of global growth went out, the costs of this have been laid bare. The property market soared, and is now in a long term correction. It has absorbed too much of New Zealand’s productive capital, for too little gain. This legacy has both an economic and a human cost. The economic cost is obvious. The human cost is everywhere: New Zealanders who have lost their jobs, have decided to live abroad, or families who are struggling. So we have a clear choice: We can continue to muddle along, handicapped by these imbalances and falling further behind other countries.