Budget 2005: Reaction to tax changes

Alex Sundakov
Executive director, Castalia

Most discussion about the possibility of further tax cuts is focused on macroeconomic questions: is the revenue strong enough, and are the surpluses sufficient to make a tax cut prudent?

The real issue is the quality of spending. This is very similar to the question that corporate boards have to grapple with when they decide whether to pay dividends to shareholders, or retain earnings for investment in the company. The rule is the same: if you cannot create enough value, return the cash.

So how does the Budget score on this test? At one level, Dr Cullen has been very good at preventing the worst excesses of a feeding frenzy. When revenue is strong, it is very hard to hold back political pork-barrel.

A good surplus in an election year is an impressive achievement. But there is little doubt that there are big chunks of the Budget which would fail the test of money being better spent by the Government than by the people themselves: ongoing investments in low-return business schemes, such as Kiwibank, dubious corporate welfare schemes delivered through NZ Trade and Enterprise, untargeted social assistance programmes providing welfare to the middle classes and on and on.

In other words, if the Government had followed the principle of giving back money it could not spend well, there would have been room for both more significant and timely tax reductions, a surplus, and possibly more spending on core services.

Colin James

Michael Cullen has set a platform for personal tax: at least this year's levels. His promise to raise bracket thresholds in 2008 and every three years thereafter - but not cut rates - embeds the huge rise in tax over the past five years.

And the platform will likely rise.

Just four years ago (let alone six) average earnings were $35,800, far below the $38,000 33c threshold. Now they are $41,330. Already 11 per cent of taxpayers are in the 39c bracket, more than twice the 5 per cent Labour promised in 1999, and rising.

But Cullen has done something bold: he has set a principle of regularly linking thresholds to inflation that a future government would abandon at its peril. The political question is whether Cullen has taken enough sting out of widening grumbles about tax, even among Labour's core vote. Answer: maybe, depending on how much those people get from the Working for Families handout system.

John Key will go better - a lot. But to do that he must cut Government spending - a lot. Labour will play on that.

Peter Conway
CTU economist and policy director

Take-home pay is higher if wages go up and taxes go down. Workers therefore will welcome the Budget announcement that tax thresholds will rise in 2008 and every three years after that. We would have preferred something based on exempting the first $5000 of income or targeted at the bottom two brackets but we can understand why the Government has taken a comprehensive approach.

But is the main issue our tax rates or our low wages?

The evidence suggests it is low wages. It is the fact that Australian pay rates are on average 25 per cent higher than in NZ that lures Kiwis across the Tasman. The union focus is on a fair share now of the significant lift in company profits over the last few years.

That is why union campaigns such as 5 per cent in '05 have struck a chord. Employers really do need to face up to this issue of low pay rather than expect tax cuts from the Government to boost take-home pay.

There are also big risks around tax cuts. We do not want to see tax cuts that result later on in cuts in important areas of government expenditure. Tax cuts usually favour the high paid. Last time there were tax cuts by National in the 1990s, 71 cents in every dollar of cuts went to those on above-average incomes.

There is a large surplus now, but how good will it be by the time we weather an economic slowdown and the full fiscal impact of the Working for Families kicks in?

Priorities for significant tax cuts have been to assist low-income families and productivity.

Some will say the tax changes are too little and too late. But this is the first time a Government has permanently addressed bracket creep. Tax cuts for low-income families are still to come.