Bugdet 2008 Insight - Focus on Tax

May 2008 - FOCUS ON TAX

Cullen’s last stand?

If recent polls are to be believed the 2008 Budget is likely to be Dr Cullen’s last – the question is can it save Labour from electoral defeat later this year – the next round of polls will make interesting reading.

Way back in 1999 there was lofty talk of getting New Zealand back into the top half of the OECD (sort of like thinking the All Blacks have done well if they just qualify for the World Cup), then came the “knowledge wave” and finally “economic transformation”. These aspirational themes have been quietly retired in the face of where we have actually ended up including currently high interest rates, rising food prices, high energy costs and a slowing economy.

The backdrop to this budget is unlike any other Dr Cullen has faced. Meaningful tax cuts have been demanded by the electorate at a time when inflation is rising and the economy slowing quickly. They have still been delivered even though there is no noticeable change in the Government’s spending patterns. A question is how much more could be given. The Government’s fiscal position is not as strong as it was. Higher embedded levels of public spending and weaker tax takes will pose a challenge, and the infrastructure demands are no less. The Emissions Trading Scheme looks like an early casualty of these realities.

The tax cuts may be too little too late but I leave that for political commentators. Time will tell whether they should have been made three years ago and whether they should have formed part of a deliberate strategy to progressively lower taxes across the board. The Government will also face some criticism around doing an about turn in relation to borrowing to fund the cuts.

Contrast this with Australia

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What's not there?

Budget 08 was the people’s budget. It was focussed on personal tax relief outside of the Working for Families’ tax package. Contrast Budget 07 which was a business budget with the crescendo for many businesses being the reduction of the corporate tax rate to 30%, the R&D regime and the positive aspects of the international regime announcements Buts what’s missing from a top end of town business perspective?

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Too little, too late? – maybe not

Budget 08 was Dr Cullen’s chance to appease the masses seeking personal tax cuts and in some cases to alleviate the financial pressures many are facing due to increases in the cost of living and in particular mortgage costs. A lot more than what we are used to and in particular the slight tinkering with thresholds announced in 2005 and cancelled in 2007, Dr Cullen moved thresholds and rates resulting in the average New Zealander earning $47,000 banking $16.54 a week from 1 October 2008, raising to $32.12 from 1 April 2011. A taxpayer earning over $80,000 will benefit to the tune of $28.08 per week from 1 October 2008 or $1460 each year. From 1 April 2011 these numbers will be $55.18 per week or $2,869.61 annually. The focus will now move onto the opposition and what they will propose in this space before the election with the Government’s hand presumably now flushed out, so it seems, as part of Budget 2008

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Where has it come from, where has it gone?

There are a number of unenviable jobs at different points in time with the Minister of Finance’s on budget day, in an election year during a slowing economy and with the masses looking for a slice of the action theoretically being one of them – but maybe not. Life is all about choices and tax is no different. Following is a diagrammatic illustration how over the last 6 years the size of the tax take has grown and where it has all gone.

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International Tax Review –
There are some thorns amongst the roses

Today’s Budget provided positive news to individuals in the form of personal tax rate reductions. The news for New Zealand based corporates investing offshore however, was not quite so good, with some of the issues arising as a consequence of what was not said rather than what was said. Ignoring personal tax relief, international tax reform is the most significant announcement in the budget from a tax perspective.

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Red tax reduction for SMEs

In December 2007 the Government released a discussion document entitled “Reducing tax compliance costs for small and medium-sized enterprises”. This discussion document was welcomed by businesses who have long argued that the tax compliance costs of New Zealand businesses are significantly underestimated and make up a large component of compliance obligations. It is pleasing that Budget 08 contained a bonus for SMEs, in that many of the threshold related measures raised in the discussion document mentioned above have been confirmed. Of more interest could be what is next on the agenda.

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ENDS

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