The calls for fiscal stimulus have become deafening in recent weeks and it’s easy to understand why.
Economic growth has weakened substantially and the Reserve Bank now has very little room to cut interest rates before it is forced to employ unorthodox monetary policy in order to meet its inflation and employment targets.
The Government could easily fund stimulus.
While a substantial portion of the recent $7.5 billion surplus is attributable to accounting adjustments at KiwiRail, Minister of Finance Grant Robertson will easily meet his self-imposed Budget Responsibility Rules, which require net debt as a percentage of GDP to be at 20% by 2021/22. The most recent statement of accounts have net debt already at 19.2% of GDP.
The IMF calculates New Zealand’s net government debt equals 10.3% of GDP, while the average advanced economy has net debt of 76.4% of GDP. In short, our national books are extremely healthy compared to those of the rest of the world: we can ‘afford’ stimulus, if we desire.
So, what form should stimulus take?
There is a general frustration with infrastructure deficits across the country, so some have argued that the Government should use economic weakness as an opportunity to invest in new projects.
However, by the time infrastructure projects are evaluated, planned, and started any benefits from urgent action might have passed.
In contrast, tax relief could take effect quickly.
If the Government announced tax relief at the Half Year Economic and Fiscal Update in December this year, changes could take place as soon as the start of the next Financial Year in April 2020 – which would avoid any complications from income facing multiple tax rates within a single tax year. Properly evaluated infrastructure projects simply would not be able to compete with that speed.
But tax relief shouldn’t just be an opportunity to splash money around.
Any changes should be designed to maximise economic growth and employment: maximum bang for the public buck.
One option commonly mooted is a tax-free threshold for earnings under a certain figure. However, this is extremely expensive: it is, after all, a tax cut for everyone. And since low income earners already face very low marginal tax rates, a tax-free threshold wouldn’t give a huge boost for incentives to work.
A better place to start would be cutting the marginal tax rate for the average income earner (on a salary of about $52,000).
New Zealanders pay 30% on all income earned above $48,000. Compared to the rest of the world, that’s a very high marginal tax rate on a pretty low level of income.
The same income earner in Britain would pay 20% on every extra dollar earned right up to $94,000 NZD, 22% in the United States up to $134,000 NZD, and 20.5% in Canada up to $114,000 NZD.
In short, even below-average income earners in New Zealand pay more tax on the margins than six-figure-salary earners overseas.
Substantially cutting the 30% tax rate on income earned over $48,000 would send a strong message: if you are a hard worker on the average income and you invest in your skills and your career, you deserve to (and will) keep more of what you earn.
While higher-income workers would receive some benefit, the greater impact would be for middle-income families who would suddenly face a much lower tax rate on every extra hour worked or promotion earned.
Cutting marginal tax rates for middle-earners would boost productivity, reward hard work, and as far as stimulus goes, have a near-instant effect. Why wait?
*Joe Ascroft works as Economist at the New Zealand Taxpayers’ Union.
63 Comments
You're probably right, but all that does is transfer the additional borrowings repayment to the next generation; not a great measure for long term survival. .
Not sure whether the government books are so healthy however. Much of the surplus has been engineered by a change in the valuation method, which suggests to me they are hiding something here. History has shown me to never trust a politician, and the jury is still out on Ardern. If people haven't noticed, the public service; Police, Health, Education, Justice, is a shadow of itself; largely because governments are not collecting enough tax from those that control most of the wealth.
Government debt is only one side of the equation, with the general public masses already tapped out in debt with government subsidies required to support the current cost of living, where is the future money going to come from to pay for this helicopter drop? From the extremely wealthy, whos money has been built on the Ponzi banking system.
A better solution is likely to be the regulation of businesses that have a vested interest in maintaining their price setting idealism. Their current business model is holding NZ inc to ransom, because our current political system is to weak to challenge them.
Regulation never works to control business avarice. The public are going to bear the ultimate result of all initiatives. Why not make it easier for them with some cash ? It may go back to businesses, in the form of increased spend, which is what the central bank wants.
Time to try it out...May be IRD can help in proportioning the hand out, with the least advantaged getting the maximum.
While its too late to cap housing loans to 3-4 times the gross household earnings, the regulation of this on the banks lending would have been helped keep the cost of living down dont you think?
Regulation to cap overseas shareholders to less than 50% on companies that have a more than 20% share of the local market would be helpful too. This would facilite more profit and taxes circulate locally. Fletchers & Sky City are mayority overseas owned, and are price takers. Contact is overseas owned, and what a model they exploit. Business pays for a transformer upgrade to meet they and other needs, yet the power companies take ownership including you land to accommodate this. Just another cost plus industry, abusing smaller local people.
Who would notice the $5 per day or whatever it would amount to? It's hardly going to unleash those animal spirits and send us all off into more property speculation to rescue the economy? Besides "changes could take place as soon as the start of the next Financial Year in April 2020 " is likely to be too late....
Depending on how much the 30% rate is reduced the savings could be as much as $50 a week for people earning up to $70k (by extending the 17.5% rate from $48k to $70k).
As for it kicking in from April 2020 being too late... Too late for what? People are not starving in the street. I presume you mean too late for the end times which have already started but you and the chicken little crew have been calling end times for decades now so April 2020 sounds just fine.
$2,500 a year in my pocket would be nice but personally I would rather the Government use it on education and health. When my mortgage floats in January the extra $200 a week will be all I need from Santa (aka Mr Orr) to keep me happy.
I'm tired of all these doom and gloomers. It's not like our residential property market is in a massive bubble with unrestrained growth for many years, or that the housing market is overloaded with stock that isn't selling. Surely all the retiring boomers (which are reaching 65 at a rapid pace) will be able to sell their large houses to younger generations that have small families, no children and cannot raise a deposit for a house. Buying a $2m house in Auckland is within the reach of the median worker earning $250,000 per year, and a household income between $500,000 to $1,000,000 per year.
Clearly the ones who contribute the most to consumption are the rich via the trickle down effect. So the solution is to cut tax to the highest tax bracket and increase all of the lower tax brackets.
https://i.redd.it/yfvk73e4bri01.jpg
They can only deal with the cards in their hands at the time.National are blamed for not doing enough in nine years. But look what they inherited and had to deal with. Can you even imagine this lot coping. Sure National could have done better. The present lot have put the country back twenty years. Full of Hype no action.
That is a lot of talkback radio points in one post.
The present lot have put the country back twenty years.
Just an observation with a moral; if you are either - or wish to be - immoral, don't bother reading further.
Many of the posting seem to be focusing on the rights and wrongs of the current situation, whose fault it is, what should have been done previously by this government and that government, and what different governments and reserve banks should and shouldn't now be doing.
I learnt an important lesson some years ago from someone who proved to be very successful in business.
He is involved in trade training and, some twenty years or so ago, the government was changing the playing field rules. I had a passing interest in this area and was aware that there was a meeting of providers in which the government agency was going to announce in detail regarding their new policy. I asked him how the meeting had gone; his comment was that everyone else was moaning and bit****ng at the presenters and offering them advice rather than as he did, questioning and looking at implications and opportunities as it affected him.
He has gone on to become a very large and successful provider while the others no longer exist.
So, while we can all spout on about the rights and wrongs - and the should be's and should do's - of the bigger picture, I reckon the smart ones will be focusing on the implications of the current situation and how they can best make the most out of it.
Just something to think about.
The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the housing market is the Australian economy. That clearly is not the case.
Sounds about right, from the RBA Deputy Governor, except that last sentence....
https://www.propertyobserver.com.au/forward-planning/investment-strateg…
Yep, love how they cherry pick the low rates and forget the other bands.
UK: Over NZ$76k pays 40% and over NZ$305k pays 45%. Makes NZ's top rate of 33% look woefully inadequate.
(see https://www.gov.uk/government/publications/rates-and-allowances-income-…)
Aus: 37% over NZ$97k and 45% over NZ$194k
(see https://www.ato.gov.au/Rates/Individual-income-tax-rates/)
Canada and US with their state taxes are a nightmare but are definitely more than NZ at the top rates and many other countries also have a comprehensive capital gains tax. "We don't know how lucky we are" springs to mind.
Exactly. Cherry picking.
But as I say above, sure reduce tax rates for middle income earners. But increase them for high.
Nats won't do this.
Labour can and should. They will win the election and it is consistent with their philosophy.
Anyone in Labour lala land listening?
Americans on average spent more on taxes in 2018 than they did on the basic necessities of food, clothing and health care combined, according to the Bureau of Labor Statistics Consumer Expenditure Survey.
No. This is not fake news.
https://www.cnsnews.com/commentary/terence-p-jeffrey/americans-spent-mo…
Yes indeed. Entertaining how Joe Ascroft forgot to mention those higher Aussie and Brit tax brackets. It would be great to raise the 17.5% rate to an income of $52,000, even better to introduce the zero tax rate on the first $20,000 or so that Aussies and Brits enjoy. But ONLY if those higher tax brackets that Australia has are also imposed (including medicare, I think 39% over A$90,000 and 47% over A$180,000). And don't forget a tax on wealth. Because we still have to find the money to repair those mouldy hospitals, keep health care and education free, and build 100,000 desperately needed state houses.
Heavy G: Exactly! Let's face it we are a bunch of whingers in NZ. Remember, there is nothing stopping any one of us from running for parliament,local government, or whatever, and changing tax rates,etc. When you look at who does get elected you realize that none of them are exceptional, although I think one of the requirements would be a thick skin.
Income tax is but one tax that raises revenue.
Fiscal stimulus requires that the measure give money to those most likely to spend it on NZ goods.
That means you should cut GST, as this has most impact on bottom half of pop in terms of the % of their income they get taxed in GST. Because GST is regressive.
So is not having CGT and no IHT
The economist quoted delivers this: no investment in infrastructure because it takes too long to have effect.
Brilliantly summing up the false economy of the Right that leads to public squalor and private (top 30%) wealth.
The infrastructure is desperately needed as pop continues to outpace it.
That means more revenue or more borrowing.
Public refuse to vote for more revenue and hair shirt government refuse to borrow more or ask Japanese or Germans who know how to do roads and rail and tunnels to get on with it.
Look at motorway in S Auckland: no one is doing anything!!
Been a mess for years .
No mention by anyone of light rail infrastructure (a la Brisbane) on North Shore extending up to Orewa.
Superfund offered to lend $50b to government over a year ago and all we got was silence.
Pathetic refusal to do what is needed.
Meanwhile they keep letting 50,000 more net into country
I'm trying to understand exactly what the problem is. I certainly don't want to go back to the bad of days of National, they were a complete joke.
Unemployment is very very low, inflation is low (that used to be considered a very good thing when boomers wanted to buy houses), but now that they want to sell them is it a bad thing? I wouldn't agree anyway.
Labour are making very good government surpluses.
They've reduced that massively out of control immigration that National were clearly and cynically uses to create fake growth, never mind that it caused other massive issues such as a housing crisis.
Labour stopped foreign buyers, which has finally done it and brought a stop to the ridiculous increases in house prices.
People like teachers, nurses etc are finally getting good pay increases after 9 years of nothing.
I'm struggling to see what the problem is, it seems quite a few people are bias to National, and really for no good reason.
Generally a lot of things people think National are better at, such as handling the economy they are actually much worse than Labour at.
There isn't enough money to give everyone payrises, give more money to those who refuse to work AND build the infrastructure to support the persistent high migration we're taking on. At the moment, the default is that we go without the infrastructure which makes everyone poorer.
Why would Labour be scared of increasing taxes on high income earners? The majority of high income earners will not be Labour voters.
Labour will get huge political mileage if they cut tax for middle income earners, and at least partly balance that by increasing tax for high incomes. Be bold for crying out loud.
By increasing the value (equity) of the trust or company the owner can access the money by “borrowing” against it through an “unrelated“ third party or by paying foreign domiciled company / trust fees that get spent on the owners when they are in that jurisdiction, so long as that jurisdiction has no fringe benefit tax equivalent.
The problem with high tax rates is you end up with big differences with the tax bill of the family if one partner earns significantly more than the other. 2x70k incomes pay $9k less in tax than 1x140k income. It is interesting that your partners income is considered for benefits but not tax.
Act party rejects.
$ 100 million of tax cuts is $ 100 million put back into the economy. Doesn't matter which tax bracket you give it too. Are they saying the higher tax brackets will somehow use this extra money to somehow generate more than the lower tax brackets would ?
It smacks of superiority, those low income earners will only waste it , they re not working hard enough to earn more now , they're probably work less if they get a tax cut , whereas those higher earners will work harder and magically generate even more income.
NZ tax system is so backwards it's not funny. It disincentivises hard work for worker with extremely narrow tax bands, while incentivising speculation on the top end and not working on the bottom end. No inheritance or wealth taxes of virtually any sort is also madness. The country could well afford proper tax cuts to make us much more efficient by putting in wealth taxes (land taxes/inheritance taxes/asset taxes) and then implementing a tax free threshold of say 25k (suddenly there wouldn't be working poor - which the government now spends around $400m per year on emergency grants and rising sharply).
Income tax rates should be 20% tax for 25-80k, a 30% tax on 80-150k and a 40% rate on over 150k (before anyone asks, I would be taxed at 40% for a bunch of my income too!). Almost all workers would be better off, speculators and the already hugely wealthy would be worse off. Serious pollution taxes should be next on the agenda.
GST should also be dropped to 10% if the government finds itself with extra income, this should then lower the general cost of living, be much easier to calculate and encourage competition.
YES , YES , YES ..................... lower taxes for middle class families and Get rid of Working for families which is just an ill-disguised effort at social engineering , and enhancing dependancy .
That WFF even exists is a disgrace
WORKING FOR FAMILIES is a disgraceful system for which Kiwi's are supposed to be thankful that the Government takes tax away from you and then gives it back to you .......... $100/ week of your own money so you can go the the supermarket to buy food.
Its the worst example of the nanny -state imaginable
John Key was supposed to get rid of "communism by stealth", as he called it. Didn't.
The Accommodation / Landlord Supplement should also go.
Difficult to get rid of WFF now without slowing migration to allow wages to naturally rise somewhat to compensate, however.
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