Tax system vulnerable to global crisis

28 May 2009

Tax system vulnerable to global crisis

Budget 2009 takes a responsible position on tax cuts in the current economic climate, but is a sharp reminder of how vulnerable our tax system is to a global recession, PricewaterhouseCoopers Chairman John Shewan has announced.

Finance Minister Bill English announced that he will defer the second and third round of tax cuts that were to take effect on 1 April 2010 and 1 April 2011.

Shewan says taxes for the period 2009 to 2013 have dropped a massive $15 billion based on Budget 2009 relative to the forecast just six months ago. Company tax has fallen $2.2 billion or 22% in the past 12 months alone.

“The key problem we face is that Government spending has been increasing steadily, rising an alarming 49% over the past five years,” he says. “Tax revenue rose by about 25% over the same period, but it still enabled us to run surpluses. The sharp downturn shows how quickly the Government accounts turn red if taxes and spending are out of kilter.”

“With a forecast $50 billion fall in the size of the country’s economy, and a forecast $15 billion drop in the country’s tax take, it is unsurprising that the Minister has indicated that tax cuts are unlikely to be reinstated before the next election. The Government is expecting to run deficits for over 10 years, so tax cuts seem likely to be delayed for much longer.”

“Today’s budget is a well balanced package but it still shows significant rises in debt over the next few years, which is simply a tax on future generations. Continued focus on spending, and on improving the quality of our tax base, possibly through base broadening measures, is critical.”

“It is pleasing to see the Government’s continued adherence to a strategy of aligning the top personal rate, company rate and trust rate at 30%. It is disappointing, however, that it seems unlikely that this is an achievable goal within the next five to eight years. We need to look at other options to ensure that, across the board, the punitive effect of taxes is able to be eased.”

ENDS

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