Opinion & Commentary
Little John shows Kevin how it's done
Key came to visit to see how Australia did things, why Australians enjoyed salaries one–third higher than those of their Kiwi neighbours, what NZ should emulate to match the better living standards. Despite Key's substantial commercial success in banking before entering politics, his self–effacing nature made it look like a case of little cousin with modest goals meeting big cousin, the ambitious and supremely confident Kevin who had everything to teach little John.
How the tide has turned. Rudd is polling poorly after lacklustre reforms while Key, along with Minister of Finance Bill English, passed down an impressive budget last Thursday and surprised everyone. And perhaps what Rudd will envy the most is Key's approval rating in the polls.
But, first, what does the budget deliver? In brief, taking effect in October, there are reductions in all income tax rates, including the top rate, which was reduced to 33% to align with the trustee tax rate. A reduction in corporate tax to 28%, paid for by a 15% increase to GST and a tightening of taxation rules, especially around tax treatment of real estate, will take effect in the next financial year.
These changes are broadly fiscally neutral over the forward estimates for the next three or four years. The cuts to the personal tax rates are deeper than expected and designed, along with spending freezes in most areas (except the big three: health, education and welfare), to return some integrity to the tax system that was lost under the previous Clark government. The reductions also reflect the present administration's conviction that growth and efficiency, not redistribution or morality, is the purpose of good governance.
The strategy of Key and English is the opposite of that of Rudd, who has used his full arsenal of rhetoric to justify meagre changes to the tax system, especially changes that will not be funded without the proposed resource super–profits tax.
Key has quietly and substantially rebalanced NZ's tax system, far more so than in Australia.
The tax reform in NZ's budget may seem a bit tame to many Kiwis but is radical compared with what the Rudd government is contemplating. Australia seems to be inexplicably averse to increasing its GST or giving it some integrity by getting rid of frivolous exemptions. Indeed, the GST was deliberately omitted from the Henry review's terms of reference.
This is surprising given that by raising the GST to 12.5% and cutting exemptions, the government would have a highly effective revenue–raiser and could do away with most of the 115 economically damaging taxes, which raise only 10 % of government revenue in any case.
In NZ, the rise in the GST is being coupled with tax cuts at every level and one–off adjustments for those on government transfers payments such as benefits, pensions and the like.
Indeed, on the broad issue of personal income tax, in the past 18 months those earning $45,000 in NZ have seen their top marginal tax rate drop from 33% to 17.5%.
This is a substantial reduction and, although partially offset by the GST increase, signals a strong move towards better incentives to earn, save and consume through lower marginal income tax rates.
In a positive move, the company tax rate has been reduced to 28%, effective from the start of the next financial year in March 2011, which signals more work for the Key government.
The top income tax rate (for earnings greater than $70,000) and trust tax rate have been aligned at 33%. This will help minimise tax avoidance but still means a 5% gap between the company and top personal income tax rates. More cuts in the income tax and trust rates are needed to level off the avoidance incentives.
This is quite unlike the Clark Labour government, which was more concerned with the principle of progressivism than its actual effect on tax take, growth or the resources wasted to gain tax advantage.
The Rudd government, unfortunately, is falling into the same trap with the RSPT. This has been demonstrated by invoking unhelpful notions of class war (big fat miners and their profits) and redistribution (by being somehow related to helping superannuation and mining companies at the margin), as well as a good dose of unhealthy jingoism (attacking multinational miners).
Where the Rudd government has tended to make bold claims about weak reform, the Key government has been quietly creating an atmosphere for more growth, foreign investment and a tax system that doesn't penalise higher earnings. Even more impressive is the government's projected 10–year spending reduction plan to reduce spending as a proportion of gross domestic product from 35% to 29%, and this is without any big–bang reform or swingeing cuts yet.
Despite only these modest, conservative and ‘steady as she goes’ efforts, Key's personal net satisfaction poll ratings (approval minus disapproval) are stratospheric at about 50% compared with minus 12% for Rudd.
Perhaps little John can teach big Kevin a thing or two after all.
Luke Malpass, a New Zealander, is a policy analyst with the New Zealand policy unit of The Centre for Independent Studies
