KEY POINTS:
This week's Budget confirmed once again that Finance Minister Michael Cullen is an extremely cautious individual.
His Budget moves will have a positive effect on the economy but they should have been introduced years ago.
The bulked up KiwiSaver scheme will foster the growth of domestic financial markets and raise the amount of equity funds available for companies wishing to expand.
But this comes after our companies have been starved of capital for far too long, and our financial markets have grown at a snail's pace compared with their international peers.
The cut in the company tax rate from 33 per cent to 30 per cent is also welcome but 23 of the 30 OECD countries have cut company taxes since 2000.
The average corporate tax rate of the 30 OECD member countries has fallen from 31.3 per cent in 2000 to 26.2 per cent last year.
The rates in the top-ranked OECD countries on a GDP per capita basis are: Luxembourg 22.88 per cent, Norway 28 per cent, United States 35 per cent, Ireland 12 per cent, Iceland 18 per cent and Switzerland 8.5 per cent.
OECD statistic suggests low corporate tax rate countries perform better than those with high company taxation.
But the most startling aspect of this week's Budget was the introduction of a business-friendly Budget by a left-leaning Government while National leader John Key bewailed the plight of "average Kiwi families" and "hard-working Kiwis".
Has Labour shifted to the right or does Cullen have a more enlightened agenda?
The main long-term policy of Labour is to redistribute wealth from the haves to the have-nots, from the wealthy to the poor. The annual Budget is the main mechanism to achieve this goal.
But this policy depends on the country having a large and growing number of "haves". Redistribution becomes extremely difficult if the wealth-creating business sector is struggling and highly skilled individuals, who pay the most income tax, are emigrating because of limited career opportunities.
Cullen has finally realised that the business sector, which creates most of the country's wealth, is struggling and Labour's redistribution policies will falter unless the country develops much stronger companies.
A comparison with Ireland, which also has a population of 4.2 million, illustrates this point. This comparison is illuminating because Ireland has been the best-performing OECD country since 1970 and New Zealand the worst.
The first point to notice is that corporate tax is expected to raise $12.3 billion in Ireland in the year to December, compared with $9.5 billion in New Zealand for the year to next June.
The remarkable feature of these figures is that Ireland has a company tax rate of 12.5 per cent compared with 33 per cent in New Zealand yet it is generating far more corporate tax.
Clearly the Irish business sector is performing extremely well, and is the back bone of the Celtic Tiger.
The next point to note is the relatively huge burden on income tax payers in New Zealand. This is because:
* The personal tax rate in Ireland is only 20 per cent up to $75,600 and 42 per cent after that, whereas in New Zealand it is 19.5 per cent up to $38,000, 33 per cent from $38,000 to $60,000 and 39 per cent above that.
* Irish taxpayers can deduct a large number of expenses including school fees, mortgage payments, business investments, childminding expenses, dental insurance, medical insurance and doctor fees.
The Irish Government raises far more through indirect taxes because its VAT rate is 21 per cent, compared with GST of 12.5 per cent in New Zealand, and Irish people have far more spending power.
The tax base is more widely spread in Ireland because of a 20 per cent capital gains tax and a draconian stamp duty, particularly on residential property. This duty, which is one of the main topics in the current general election campaign, rises progressively to 9 per cent on properties sold for $1,170,000 or more.
The huge Irish tax base enables the Government to spend $103.9 billion this year, 35 per cent of GDP, and still have a surplus. Dr Cullen is forecasting Crown expenditure of $56.1 billion or 32.4 per cent of GDP.
The big difference between the two countries on the expenditure side is in social welfare (including state pensions), health and education. These three items account for about 70 per cent of total Government spending in both countries.
Health is a particular concern in New Zealand because of the ageing population and the huge cost of modern life-saving drugs. Since 1990 spending on health has fallen from 84 per cent of the OECD average to 81 per cent, whereas in Ireland it has risen from 67 per cent to 101 per cent.
The Irish Government spends $6700 a person on health, compared with New Zealand's $2800.
Only eight of the 30 OECD countries now spend less on health, on a per capita basis, than New Zealand.
This clearly indicates that there has to be a far stronger productive sector, able to pay more tax, if the Crown is to continue to provide a modern health system.
Education is another area where we no longer have enough money to keep up with the rest of the world.
In 1991, 22.9 per cent of New Zealanders aged between 25 to 64 had tertiary qualifications, compared with 15.9 per cent in Ireland and an OECD average of 17.9 per cent.
OECD figures show that 25.3 per cent in that age group have achieved tertiary attainment in New Zealand, compared with 28.3 per cent in Ireland and an OECD average of 25.2 per cent.
We have had the lowest growth in tertiary attainment of all OECD countries over the past 15 years.
Korea, which is immediately behind New Zealand on the OECD GDP per capita ranking, has raised its tertiary attainment from 14.4 per cent in 1991 to 30.5 per cent.
New Zealand is sleepwalking to the poor house, but this week's Budget finally shows that at least one Government minister is aware of the situation and is prepared to do something about it.
Unfortunately, next year he will be back playing the pre-election lolly scramble game and the 2008 Budget will be dominated by political considerations rather the long-term well being of the economy.
As far as this week's Budget is concerned, the bulked up KiwiSaver scheme and a lower company tax rate are positive developments but they don't go far enough.
New Zealand business, particularly exporters, is in an extremely weak position on an international comparative basis. The country desperately needs a stronger business sector to boost exports and create more high-income paying jobs. The higher tax income from these companies and individuals can then be allocated to health and education.
In light of this, Thursday's Budget should also have contained a programme of company tax cuts of 1 per cent a year from 30 per cent for the year beginning April 1, 2009 to 25 per cent five years later.
This would have boosted business confidence and dropped us below the OECD company tax rate average of 26.2 per cent, although that is expected to decline over the next few years.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
bgaynor@milfordasset.com
