Michael Cullen acknowledged in his Budget that the economy had under-performed over the long term. He attributed this to "a complex interrelationship of factors which do not lend themselves to simplistic bumper sticker solutions".
He observed that "there is a need to lift [the] sustainable growth rate if we are to
see a long-term rise in our standards of living relative to the rest of the developed world".
I agree with both comments.
The Budget went on to state that there is little evidence to suggest that lower taxes would assist in lifting New Zealand's economic performance. Here I disagree.
Cullen said the claim that New Zealand was highly taxed by developed country standards was a misrepresentation, "wilful or otherwise".
He cited an OECD study and two bar charts from The Economist (one based on the OECD study) to support his view.
The two separate references compare selected aspects of the tax structure among countries. But neither focuses on the overall tax burden in the countries examined.
Cullen said the OECD study showed that New Zealand's "tax wedge on labour" was lower than in all the countries studied except Mexico and Korea. However, the study he quoted did not actually measure the tax wedge on labour. GST, for instance, was omitted.
Instead, the finding relates to the income tax wedge for a single person with no children earning the average manufacturing wage.
This wedge is defined as the difference between total labour costs to the employer and the corresponding net take-home pay of the employee.
Also ACC levies were not included, contrary to Cullen's assumption, as they should have been.
People who focus only on statutory rates of income tax or marginal income tax rates risk drawing the wrong conclusion about the overall tax burden.
They overlook the fact that New Zealand's income and consumption tax (GST) bases are broader than those of most other countries.
No measure of the tax burden is perfect. But the best measure is probably the ratio of general government total outlays to GDP.
Government spending must generally be funded from taxes. The OECD estimates that New Zealand's general government outlays will be equal to around 40 per cent of GDP this year.
OECD countries are among the most highly taxed in the world. Within the OECD group, the tax burden in Ireland, the United States and Australia is much lower than in New Zealand.
The tax burden in the dynamic countries of Asia is generally about half that in New Zealand, at about 20 per cent of GDP.
Being around the middle of the OECD rankings puts New Zealand among those countries that are relatively highly taxed.
Taxes reduce the incentive to work harder, acquire education and training, save and invest. National income is lower as a consequence.
Studies generally find that these so-called deadweight costs of taxes are high. In New Zealand, they probably amount to at least 30c for the last dollar of tax raised.
This implies that resources are wasted and growth is held back if marginal spending programmes do not yield benefits worth at least $1.30 for each dollar spent.
A good deal of spending by central and local government almost certainly does not yield this return.
As tax rates rise, deadweight costs rise more than proportionately. Thus high taxes are particularly harmful.
Cullen claims that "significant cuts to personal taxes in 1986, 1988, 1996 and 1998 and a massive cut to the corporate rate in 1988 all failed to lift the sustainable growth rate". This claim is a good example of a simplistic bumper sticker for three reasons.
First, the 1986 tax cut was accompanied by the introduction of GST, and the 1988 cut was followed by an increase in GST from 10 to 12.5 per cent. Total government spending was not reduced. In fact, it continued to grow, as did the deadweight costs.
Second, and most important, the government spending share of the economy - that is, the overall tax burden - did decline in the five years following the 1991 Budget from 45.3 per cent of GDP to 37.6 per cent, according to the OECD.
This was clearly a factor in the strong growth performance of the economy in the early and mid 1990s, as was the more efficient tax system with broader bases and lower rates that was achieved in the 1980s.
Third, the 1996 and 1998 tax cuts were focused more on income redistribution than on growth. The top rate, which is important for growth, was unchanged.
Although Cullen argues that there is little evidence that tax cuts can play a role in lifting New Zealand's growth rate, some of the policies implemented by the Government in fact assume that lower taxes are good for the economy.
Industry grants can be viewed as selective negative taxes. They have risen as part of the Government's jobs machine.
Tax concessions to encourage refits of luxury yachts in New Zealand rather than overseas have been announced.
If lower taxes have no effect on economic performance, how can the Government possibly justify such policies?
I have no doubt that lower government expenditure relative to GDP, and hence lower marginal taxes over time, as proposed by the National Party, will help to improve New Zealand's economic performance.
I know of no country that has achieved sustained per capita economic growth of 4 per cent or more with total government spending at New Zealand's level of around 40 per cent of GDP.
Other growth-enhancing policies are also needed, of course. But without lower government spending and taxing I believe New Zealand has no chance of getting back into the top half of the OECD league.
* Don Brash is the former Governor of the Reserve Bank and now a prospective National Party candidate.
Dialogue on business
Michael Cullen acknowledged in his Budget that the economy had under-performed over the long term. He attributed this to "a complex interrelationship of factors which do not lend themselves to simplistic bumper sticker solutions".
He observed that "there is a need to lift [the] sustainable growth rate if we are to
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