Why We Might Need To Pay More Tax

Tuesday, 12 November 2024, 9:00 pm
Article: RNZ

Susan Edmunds, Money Correspondent

Whether New Zealanders need to pay more tax is likely to be a defining issue of the coming years, commentators say.

While discussion has recently focused on whether the country needs a capital gains tax, analysts say there is a more fundamental issue that also needs to be addressed first - whether we are collecting enough tax.

Treasury chief economic adviser Dominick Stephens noted in a recent speech that the country is running a fiscal deficit of about 2.4 percent of gross domestic product.

In Treasury's' 2021 long-term financial position statement, it noted a number of pressure points for the economy including the cost of climate change, New Zealanders living longer and healthcare costs rising.

It said net debt was likely to be on an unsustainable trajectory if expenditure and revenue followed historical trends.

At the same time as New Zealand faces increased costs, the proportion of the population working and paying tax is expected to decline.

Inland Revenue also raised the issue in consultation for its long-term briefing this year.

'It's the single most important issue in the country'

University of Auckland professor in economic Robert MacColloch said the weakness in the economy meant the country was likely to struggle to find revenue to fund health and education which would open a tax debate at the next election.

"I think that's what will define the next election. Labour will probably look at what the UK Labour Party is doing, having to raise taxes to pay for social series. National won't want to. I don't think either of them is offering a path to greatness."

It was not clear there was any emerging industry that would come to New Zealand's rescue to drive economic growth, he said.

"It's the single most important issue in the country… we have two parties, one - Labour - saying we need to increase taxes because of the aging population and to rebuild health, the Nats saying we don't want to increase taxes so we're going to try to deal with it through getting in Lester Levy or finding efficiencies in firing middle management. In my view you need new ways of designing systems."

He said savings accounts could be used as an alternative. "Some have touted what the Australians are doing. They have their mandatory saving account for retirement. The average balance in KiwiSaver is only $30,000 and the average in Australia is $300,000 and they still don't think that's enough… those savings accounts create alternative funding mechanisms."

'The sooner this gets started the better'

Tax commentator Terry Baucher said the 2.4 percent deficit Stephens mentioned was equal to about $10 billion.

"The government's cuts in theory help balance the books but I know some economists would argue they could also replicate the problem that happened in the UK after 2010 - they end up just accelerating the deficit issue.

"My view is that when you consider the rising cost of superannuation together with the rising associated costs of aged healthcare and then take account of growing weather events, it really is when, not if, the tax take rises. To put a number on it, probably close to 2 percent of GDP or $8 billion. I'd add that couldn't happen immediately but would need to be staged in.

"The sooner this gets started the better but the politics of the present government seem set to try and kick the can further down the road. The older, wealthier boomers and Gen Xers are those who are most likely to have to bear the additional tax costs, as they have the wealth, but also are unlikely to vote for change. "

He said "like it or lump in" higher taxes were coming in some form. "We haven't really taken into account the risk we're carrying around climate change mitigation."

The message from Treasury had been consistent since 2016, he said.

"In the present system there is not enough money. We're either going to have to increase taxes or make some very dramatic changes."

While superannuation was often talked about as an area to target, it was one where the change happened slowly. "Climate change is happening right now."

Baucher said people often used an analogy of a household to talk about government debt. But while households might aim to be debt-free, for governments it was about managing the debt.

'It's a question of how you use the debt…. I don't think you can cut $10b easily."

The country could consider social security taxes, he said, that were directly targeted at funding welfare and superannuation payments.

There was a common misconception that pensioners had "paid their taxes" for their pension but that was not the case - they had paid taxes for those receiving the pension while they were working.

Dennis Wesselbaum of Otago University, agreed an ageing population could put pressure on public finances.

"I think it is likely that New Zealand's tax take may need to increase as the population ages. With a growing number of retirees, there will be increased demand for healthcare and other services."

He said we could also focus on improving the efficiency of existing government services or downsizing the government, or encourage older people to stay in the workforce longer. It could also encourage more younger migrants into the country to help balance the demographic shift, or look at other ways of increasing revenue, such as other forms of taxation.

NZ Initiative chief executive Eric Crampton said it would come down to choices.

"Either increase tax take, or reduce benefits paid to old people, or reduce other spending, or a mix of some or all."

Shamubeel Eaqub, chief economist at Simplicity, said the problem came down to more demand for services happening at the same time that fewer people were expected to be paying taxes.

There would also be more pressure from older people retiring without their own homes, he said. That had not been included in most estimates of what would be needed into the future. New Zealanders would need to examine what services were offered, to whom and at what level.

"There's always the question of what must you do and what do you choose to do, what quality do you deliver of those things.

"We've made a lot of promises to ourselves that are too generous compared to what we are willing to prepare for. "

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