CTU Media Release

11 October 2011

There are better options than tripling the EQC levy

“The rise in the EQC levy from 5c to 15c per $100 of insurance cover is effectively a tax to raise funds for the government”, says CTU Economist Bill Rosenberg. “The EQC has insufficient funds to cover the Canterbury earthquakes so the government will have to find an estimated $1.2 billion from borrowing and the increased levy reduces that to $490 million. There is in reality no difference between this expenditure and all the other expenses required by the earthquakes. A much fairer way to raise funds to pay for the earthquake would be a special earthquake tax targeted at those who could most afford it.”

“There is no doubt EQC levies will have to rise, but even this tripled levy will still take no less than 30 years to rebuild the EQC’s Natural Disaster Fund. Substantial rethinking needs to be done on many aspects of the EQC in the light of the earthquakes, but this is a revenue raising exercise with no obvious logic to its size or form”, says Rosenberg.

The government’s financial position for the year ended June 2011, released today, shows net government debt $1.4 billion better than expected in this year’s Budget, equivalent to 20.0 percent of GDP. The Operating Balance was thrown out by the $9.1 billion provided for the earthquakes and would otherwise have been similar to the previous year according to Treasury.

“However this has been at the expense of already very tight Health and Education budgets which have been under spent by $300 million each. We estimated in 2010 that the Health Budget was already underfunded with any additions to programmes being funded by cuts in others. Both have also had unbudgeted costs from the earthquakes. Things have turned out even tougher than expected for these services.”

Rosenberg also pointed out that the cost of the tax changes that took effect in October 2010 was even higher than budgeted. In the 2010 Budget, tax cuts were forecast to cost approximately $2.5 billion during the year. In fact they cost $2.7 billion. The 20 percent increase in the GST rate was forecast to raise $2.0 billion to offset the cost of the cuts. In fact it raised only $1.6 billion. “Together, the effect of the tax changes to worsen the deficit in the operating balance will have been closer to $1 billion in lost revenue rather than the $460 million forecast,” he concluded.

ENDS

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