Ideas@TheCentre
NZ’s budget surprise
Luke Malpass |
21 May 2010
GST has been increased to 15% and all personal income tax rates have been reduced from 1 October this year.*
What this means is that for a person earning $48,000, the tax rate has dropped from 33% to 17.5% in the last two years. This is a substantial drop. Prime Minister John Key is also claiming that this new package means that 17.5% is the highest marginal tax rate for three quarters of taxpayers. This is a remarkable figure and signals a move in the right direction. The changes also mean that the top rate of personal income tax is now aligned to the trust tax rate at 33%, thus closing a tax avoidance loophole.
Perhaps most surprising is a 2% reduction in company tax rate to 28% from the start of the 2011–12 financial in March next year. This is of note because it is immediate, unequivocal and not funded by any sort of ‘resource super profits tax’ such as in Australia.
However, there is a downside. These moves are fiscally neutral over the next three to four years and do not address the overall tax burden that New Zealand faces. Core Crown expenditure is at an all time high at 34.7% of GDP, and the increase in revenue gained via GST will make this more difficult to reduce.
Although this particular rearranging of the tax system is positive and to be welcomed, it is overall expenditure that needs to be addressed by government policy into the medium term. This is something the current government has been assiduously trying to avoid, so as not be accused of carrying out swingeing cuts. So far, with help from New Zealand’s export led recovery, it has been successful.
The 2010 Budget was surprisingly bold compared to what was expected, but considering the government’s substantial political capital, a bit timid, especially on the spending side. However, signs are positive that cuts in low quality spending may be down the line in the medium term. It now seems to be a case of ‘watch this space.’
In the meantime, Kiwis can look forward to 1 October!
*Personal income tax rate changes: 0–$14,000, 12.5–10.5%; $14,001–$48,000, 21–17.5%; $48,001–$70,000, 33–30%; above $70,000, 38–33%.
Luke Malpass is a Policy Analyst with the Centre’s New Zealand Policy Unit.
