Thomas Pippos: Tax reform always on Budget agenda

2 comments
As past finance ministers delivered fiscal policy, they kept an eye on the surplus and reacted accordingly.

Finance Minister Bill English outlined another "zero" Budget last year, largely because of the global financial crisis and the 2011 Christchurch quake. Photo / Mark Mitchell
Finance Minister Bill English outlined another "zero" Budget last year, largely because of the global financial crisis and the 2011 Christchurch quake. Photo / Mark Mitchell

Budget 2007

Sir Michael Cullen's second to last Budget as Finance Minister in the then Labour-led Government had as its centrepiece a business tax reform package, which included reforms that were (at the time) the most substantial changes to the business tax environment in recent times.

This included the first reduction to the corporate tax rate in 20 years (from 33 per cent to 30 per cent) and the introduction of the ill-fated research and development tax credit, which was to be canned after only one year in operation when National took the treasury benches.

The Government also announced material enhancements to KiwiSaver, with a projected additional cost of $303 million in 2007/08, rising to $1.2 billion in 2010/11.

These reforms were announced as the sun began to set on a generation of surpluses and economic growth, with the Government forecasting an operating surplus of $6.3 billion.

Budget 2008

Election year Budgets can easily become a lolly scramble. 2008 was somewhat more restrained than what could have been the case with the Labour Government bowing to political pressure and announcing personal tax cuts - although fairly modest ones.

By this stage the steam was starting to come out of the global economy and the international outlook suddenly did not look quite as rosy for the first time in many years.

The operating surplus was forecast at $1.3 billion.

Budget 2009

2009 marked the National Government's first Budget and Bill English must have felt he had drawn the short straw. After watching the previous Labour Government preside over continually climbing surpluses, the backdrop to Budget 2009 was the recession spawned by the global financial crisis and subsequent hole left in the Government's accounts.

That hole was represented by a forecast operating deficit of $7.6 billion. Tax revenues were slumping, and as a result the Budget saw an end to the large spending increases that were a hallmark of the previous Government.

With this context, it was unsurprising that the Government announced that personal tax cuts that it had campaigned on in the 2008 election would be delayed.

Other than the delay in tax rate reductions, Budget 2009 was quiet from a tax perspective, with the only other tax initiative being the cessation of the KiwiSaver mortgage diversion facility.

Budget 2010

Budget 2010 was focused on reform of the tax system and improving the Government's deficit position. Following recommendations made by the Tax Working Group in late 2009, the Government announced its significant tax reform package.

The centrepiece was the "tax switch"; an increase in the rate of GST from 12.5 per cent to 15 per cent, and a decrease in personal income tax rates.

This was touted as a shift away from the taxation of labour towards the taxation of consumption, designed to encourage savings and productivity.

The corporate tax rate was also reduced, from 30 per cent to 28 per cent.

To balance the books, the Government removed the ability to claim depreciation deductions on most buildings, and the accelerated depreciation available on new plant and equipment.

While a clear case existed for removing depreciation on residential rental properties, the extension of this reform to commercial and industrial buildings was a surprise for the tax community.

Some of the consequences of this aspect of the reforms, particularly in the context of industrial buildings, are a continuing source of tension for businesses.

The economy, however, was still stuck in the doldrums, with the operating deficit before gains and losses forecast for 2010/11 at $8.6 billion (this, however, ballooned out to an actual deficit of over $18 billion, largely as a result of the Christchurch earthquakes).

Budget 2011

In the context of an economic recovery failing to fire, an uncertain global outlook, two Christchurch earthquakes and the receivership of South Canterbury Finance, the Government produced a relatively austere Budget in 2011.

The forecast deficit for 2012 was $9.7 billion.

However, the Government was putting the brakes on spending and aiming to return to surpluses by 2015 with reforms designed to save $5.2 billion over five years.

Tax largely took a back seat in Budget 2011, with the main tax reforms being in the KiwiSaver area, where Government support was reduced - designed to save $2.6 billion over four years.

Budget 2012

Bill English's fourth Budget came at a difficult time for the Government - the effects of the financial crisis continued to linger and the massive recovery required in Christchurch had become clear.

Another "zero" Budget kept the hunt for surplus in 2015 on track. However, this was (and remains) a very close call.

Tax barely registered, with a series of minor reforms announced that were in essence revenue-raising measures - including the controversial "paper boy tax".

Budget 2013 - What Next?

As the economic recovery looks to gather pace, the expectation is for more of the same - positioning for the return to surplus as a hallmark of the upcoming 2014 election year.


Thomas Pippos is chief executive of Deloitte.

- NZ Herald

Have your say

We aim to have healthy debate. But we won't publish comments that abuse others. View commenting guidelines.

1200 characters left

Sort by
  • Oldest

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_n6 at 18 Apr 2014 01:26:12 Processing Time: 563ms