Cut tax soon, Treasury tells Government

Michael Cullen

Treasury has told the Government it should cut personal and company taxes as soon as the next Budget.

The rate of growth in government spending should also be reduced to give more scope for tax cuts and other measures to promote growth.

The department's briefing to the new Government, released yesterday, says the top personal 33 and 39 per cent rates should be cut, as should the 33 per cent company rate. High effective marginal tax rates should also be reduced.

The briefing paper, which has handed National rich political ammunition, says international studies suggested high marginal tax rates damage economic growth.

The briefing questions the quality of services the public has received from the significant increases in state sector spending since Labour came to power in 1999.

It also questions the proposed carbon tax, recommends the Resource Management Act be reviewed to ensure it does not unnecessarily restrict development, and suggests the Government consider selling state owned enterprises.

National leader Don Brash said the briefing showed how misleading Labour had been during the election campaign about the impact of National's $3.9 billion tax cut plan.

Labour had argued tax cuts would not improve growth, he said, but Treasury was saying that was wrong.

"Treasury has laid bare for all to see the blatant deception of the Labour re-election campaign. More importantly, Treasury is telling the Labour-led Government it must mend its profligate ways and improve the poor productivity of the public sector."

But Finance Minister Michael Cullen dismissed the briefing as the usual "ideological burp" from Treasury every three years. He remained largely unconvinced tax cuts would change the growth rate.

Treasury was not saying there was room for large tax cuts now, unlike those National advocated before the election, Dr Cullen said.

"It is actually saying the Government should be maintaining the current level of surpluses and the current debt track."

Treasury was saying if the rate of growth in spending was cut back below the $1.9 billion set aside annually over the next few years, $500 million a year could be provided for progressive tax rate changes.

Dr Cullen said when Treasury was asked to identify where the savings would be made to pay for that, the response largely consisted of measures "completely inconsistent" with Government policies, like making students pay more.

He said the concerns raised about company tax would help the Government's planned review of the business tax regime.

The briefing also fires a salvo at rising state sector spending.

"There is little information to indicate that New Zealanders are getting more services and better results from the public sector for the large increases in resources provided," the briefing says.

"What little information exists is not encouraging. Ministers and the public are frequently surprised by poor performance."

The briefing notes a 27 per cent rise in public service employees since July 1999 compared with a 20 per cent rise in the private sector. While noting a significant proportion was to strengthen delivery of front-line services, a significant share had also gone into "expansion of head offices".

National finance spokesman John Key said Treasury had confirmed that cutting tax was the correct path, but it was the first thing the Government had rejected. 

Treasury's prescription:

* Cut personal, company and high marginal tax rates to boost economic growth.
* Reduce the growth in government spending.
* Rethink the carbon tax.
* Cut remaining tariffs and liberalise overseas investment regime.
* Review Resource Management Act to stop red tape strangling development.
* Consider selling state owned enterprises.

Dr Cullen's response:

Nothing more than an "ideological burp".