Business shrugs off $1.4bn tax cut

Michael Cullen’s business tax relief includes $720 million "recycled" from carbon tax. Picture / Mark Mitchell

Michael Cullen's sixth Budget handed business more than $1 billion in tax cuts yesterday and brought forth KiwiSaver, a work-based savings scheme.

The Finance Minister warned that spending cuts or increased national debt would be required for a Government to fund broad tax cuts in the "foreseeable" future.

Although personal tax rate thresholds will be raised 6.12 per cent from April 2008, Cullen once again dismissed calls for wide-ranging tax cuts like the A$21.7 billion worth disclosed by his Australian counterpart, Peter Costello, in his Budget this month.

Cullen said tax cuts were not self-funding and, if unaccompanied by spending cuts, led to "burgeoning deficits and debt".

Tight capacity constraints in the economy, economic growth forecast to halve to about 2.5 per cent this year and a Labour-led Government focused on strong public services in education and health prevented broad tax cuts.

"Looking forward, there is not room for large, significant tax cuts unless you remove large, significant expenditure," Cullen said.

"As always, too much jam now is likely to lead to only crumbs later."

Cullen's business tax relief package of $1.4 billion over the next four years includes $720 million "recycled" from the recently announced carbon tax.

However, he said the $1.42 billion cost of the business tax proposals was equivalent to "a cut of about 2 per cent in the corporate tax rate".

Business New Zealand chief executive Phil O'Reilly said this claim overstated the net benefit to business as nearly half the $1.4 billion was a one-off - meaning the ongoing business benefit was more like $700 million.

"Today's Budget is only marginally good for business and, for some enterprises, the net impact will be negative," he said.

"Sadly, the opportunity to make fundamental improvements to the environment for business has not been taken."

Deloitte tax partner Greg Haddon shares that view. The bulk of the cuts came from changes to the depreciation regime allowing business to write off short-life assets such as computers more quickly.

Businesses would pay less tax in the short term but, over the life of the assets, they would pay the same amount of tax.

"This is like a short-term loan to business," Haddon said.

National Party finance spokesman John Key was also critical.

"This is a Budget all about lost opportunity. Small, begrudging changes have been made to taxes only because National is breathing down Labour's neck," Key said.

Cullen said changes to depreciation rules would better reflect how assets declined in value. Costing $977 million over four years, this is the biggest single component of the business tax package.

Other features include aligning provisional tax and GST payment dates and pre-announced changes to fringe benefit tax. Temporary tax exemption on the overseas income of new migrants and of New Zealanders who have lived overseas for 10 years will be provided. Tax rules on securities lending are being more closely aligned with Australia's.

Other changes, costing $220 million over four years, would ensure portfolio investments by financial intermediaries were not overtaxed relative to direct investments, the Finance Minister said.

The Government wanted the business tax package to encourage savings, ensure a more productive use of capital, improve New Zealand's access to worldwide capital, skills and labour and reduce compliance costs.

Cullen said KiwiSaver, an optional work-based savings scheme, would begin on April 1, 2007. The Government would contribute $1000 to each account and subsidise fund management fees.

People would be able to put 4 or 8 per cent of their gross salary automatically into a savings fund which they could access at 65.

"New Zealanders often bemoan the consequences of low saving, such as high levels of foreign ownership. But, if we are to own, literally, more of our future we must lift our level of savings," Cullen said.

Jim Minto, chief executive of insurer and fund manager Tower, said KiwiSaver would help people determine their own futures, although the Government should be looking at aligning insurance with workplace savings.

"The big question is whether a subsequent government will turn the switch and make this [KiwiSaver] compulsory," Minto said.

Key said the fastest way to increase savings would be to raise low income earners' wages.