Wellington, 9 September 2020 – If Labour’s goal is to get debt back under control then it would make more sense to prune back spending, such as on superannuation, says David Law, senior research fellow at The New Zealand Initiative.

Today, Labour finance minister Grant Robertson announced a lift in the top tax percentage from 33% to 39% for anyone earning over $180,000. Everyone else’s tax rate remains the same.

David Law says while Labour is right not to impose substantial tax increases during what will be a substantial economic downturn after the Covid-19 lockdown, there are far better ways to get debt-to-GDP levels back to manageable levels.

The Government’s response to the economic challenges of Covid-19 has primarily focused on new spending which will balloon public debt from 19% of GDP in 2019 to 30% in 2020 and peak at nearly 54% of GDP by 2024. It is only expected to modestly fall to 42% of GDP by 2034.

“Getting debt under control is the most important thing, especially when the next crisis requiring large debt is as unpredictable as Covid, such as earthquakes.

“Fiddling with taxes for 2% of the workforce, which will raise little revenue, is not the way to go about it,” Law says.

He added that a tax rate of 39% on income over $180,000 is estimated to raise only $550 million annually. To put that into perspective, the wage subsidy has cost on average that much to run each week.

The wage subsidy scheme has cost the New Zealand taxpayer about $14 billion so far.

“On the expected revenue from this tax change, it will take 26 years to pay off the debt accrued by that wage subsidy. In fact, the new revenue may not even be enough to service the interest on our total Covid-19 recovery,” Law says.

Instead, Labour would be better to focus on relatively easy moves to reduce the debt-to-GDP ratio without hitting critical services.

For instance, it could cease borrowing to make contributions to the NZ Super Fund, change the indexing of NZ Super and slowly increase the age of eligibility.

Law outlined how such low-hanging fruit could be achieved in his policy point, Borrowing to Save: Retirement income policy after Covid-19.

“By following this path, debt could be reduced to 25% of GDP by 2034. They could do this without any new taxes or cuts to health, education or welfare,” he says.

Read more:
Borrowing to Save: Retirement income policy after Covid-19 is available here.

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