Over-Spending and Over-Taxing Stifling Growth

“The 2005 Budget is a missed opportunity to reduce government spending and taxing that is stifling economic growth, and to use good economic times to set out a forward-looking reform agenda”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

The Business Roundtable had been calling on the government to implement the main recommendations of the McLeod Tax Review established by finance minister Dr Michael Cullen. It advocated moves to a lower, flatter tax structure for personal and company income tax rates.

“Instead the government has basically tinkered with business taxation”, Mr Kerr said. “Not all tax cuts are created equal, and selective concessions are not the way to go. Some of the changes announced are worthwhile but they are no substitute for serious tax reform, extending the broad-base, low-rate strategy that past governments have adopted.

“On the personal tax side, reductions in high tax rates to change incentives at the margin, not the minimal threshold changes foreshadowed in the budget, are needed to encourage work, saving and investment. The budget package, together with last year’s Working for Families package, means many taxpayers are facing high effective marginal tax rates, and tax policy is not being used to pursue the government’s ‘top priority’ goal of faster economic growth.

“The budget plans to increase government spending by a further 26 percent in the next four years, when cumulative inflation is only 10 percent and population growth is only 4 percent. There is ample scope to cut tax rates, given greater fiscal discipline. Emphasising the cash balance is a return to inferior fiscal indicators, and does nothing to prove tax cuts are unaffordable, particularly if more capital expenditure were financed on normal commercial lines and greater use made of private enterprise and funding. Tax cuts are less inflationary than government spending of the same amount. The massive increases in government spending, including the Working for Families package, are poorly justified, putting pressure on monetary policy, the exchange rate, exporters and the current account deficit, and holding back New Zealand’s growth rate.”

Mr Kerr said that the four-year forecasts of average economic growth to 2009, at 2.8 percent a year, are well below the 3.7 percent growth rate achieved over the decade to 2003, and below the average of 3.4 percent forecast for Australia in the period to 2009.

In the same period, New Zealand’s average real per capita GDP growth rate is projected to fall to 1.9 percent a year, under 80 percent of the 2.5 percent average of the decade to 2003.

“As business organisations have been warning, the chickens are coming home to roost”, Mr Kerr said. “Excessive spending, taxation and regulation of the business sector are reducing the trend rate of growth, not moving it to a higher path. The government is refusing to acknowledge this reality.

Mr Kerr said that the discussion paper to be released on the Stobo tax proposals deserved consideration. “However, there is no evidence of savings problems to justify the intrusive workplace savings proposals. They will impose significant costs on employers and taxpayers. Moreover, they have little to do with a serious growth strategy. As the International Monetary Fund pointed out in its recent report on New Zealand:
Even if the proposals currently being debated do lead to an increase in aggregate savings, the effects on investment and growth are unlikely to be large as New Zealand already has easy access to international capital.

“Once again the government has turned its back on policies that would improve the business environment and increase household incomes, such as lower spending and taxation (including scrapping the unjustifiable carbon tax), a greater role for private enterprise in the economy and in providing health and education services, less restrictive labour law, serious infrastructure reform including changes to the Resource Management Act, and welfare policy initiatives to reduce benefit dependency.

“A failure to move in these areas, contrary to policy directions across the Tasman, means that New Zealand will slip further behind Australia and fall far short of its potential”, Mr Kerr concluded. “The budget forecasts and projections confirm that the government’s goal of returning New Zealand to the top half of the OECD income ladder is nowhere in sight."

ENDS

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