A month or so ago, Michael Cullen presented his sixth, and hopefully final, Budget to Parliament. It revealed that he plans to rake in some $48 billion in tax in the year which began on 1 July this year, a full 50% increase on the tax revenue received in 1999/2000, the last year driven largely by the National Government which lost office at the end of 1999.
This extraordinary increase over just six years was partly the result of the buoyant economy in recent years – in turn the result of strong international prices for meat and dairy exports, low interest rates, and the big inflow of people which followed September 11 – and partly the result of all the new and increased taxes which Michael Cullen has saddled us with: particularly the increase in the top personal tax rate from 33% to 39%, and the increased taxes on petrol, alcohol, and cigarettes.
One of the consequences of this big increase in the tax-take of the Labour Government is that, while the income of the average household in New Zealand has gone up over the last five years before tax and inflation, after tax and inflation there has been no increase at all. That’s right: despite the buoyancy in the economy in recent years, the average household is no better off now than it was five years ago, after tax has been paid and increased prices have been taken into account.
Michael Cullen’s Budget offered some tax relief – but it amounted to only 67 cents per week for people earning between $10,000 and $38,000, and it won’t be available until 1 April 2008! With justification, it has been referred to as Michael Cullen’s “chewing gum Budget”.
So the first and obvious point to make is that tax relief would have the desirable impact of putting more money in the hands of taxpayers, and the National Party is committed to providing tax relief for all hard-working New Zealanders.
But if that tax relief is well designed, it should also change the incentive people have to work, invest, and take business risks. In other words, it should have a positive impact on the economy more widely.
Clearly, if people face a high tax rate on any additional dollars earned, they will be rather less likely to work harder, acquire new skills, or take on more responsibility.
So one of the objectives the National Party will be seeking to achieve with the tax relief we are committed to providing is to reduce the tax rate on “the additional dollars earned”.
If we were simply intent on putting more dollars in the pockets of taxpayers, that could be done by any number of changes in the tax system. We could, for example, provide a “tax-free threshold” below which income would be entirely free of tax. That would put more money in everybody’s pocket, but would of course do nothing to reduce the tax rate on additional dollars earned.
When we announce our tax policy, it will be obvious that we are keen both to put more money in people’s pockets and to reduce the tax rate on additional dollars earned.
How will National fund the proposed tax relief? At time of writing, we have not announced our plans in this regard, but let me assure you that we will present a very responsible package of measures.
We know full well that the public does not want a reduction in government spending on healthcare or education and there won’t be a reduction. We will, however, be committed to ensuring that taxpayers’ money spent on both healthcare and education is well spent – and much of it is not now!
We know that, despite a very large increase in health spending over the last few years, there are still 120,000 people waiting for their First Specialist Assessment, with another 60,000 people waiting for surgery. We know that, despite that increase in spending, the number of operations actually performed has barely increased in five years. We know that there has been a great increase in bureaucracy in the health sector, with 21 separate DHBs, and 77 separate PHOs. In education, we know that enormous sums have been wasted on sub-degree courses in the tertiary sector, where 70% of those who enroll do not complete the course. We know that there are some 350 people employed by the Tertiary Education Commission at a cost of some $40 million annually – with a benefit which is impossible for the outside observer to detect. We know that huge sums have been spent on establishing the NCEA, with appallingly bad results.
No, we won’t be slashing government spending on healthcare or education to pay for tax relief, but we will be intent on ensuring that taxpayers’ money is well spent.
Michael Cullen has argued that any tax relief would be bought at the expense of higher interest rates – in other words, he has argued that if you spend your own money rather than having government spend it for you, the inflationary pressures so created will force the Reserve Bank to push up interest rates to keep inflation under control.
Well, that’s a bit rich from Michael Cullen. It is only a few weeks since an OECD report on the New Zealand economy suggested that an important reason for the seven increases in the Reserve Bank’s Official Cash Rate over the last 18 months was the strong increase in government spending over 2004 and 2005 – for which of course Labour was responsible!
I spent almost 14 years of my life getting inflation under control, and keeping it there, and I understand as well as anybody in the country that aggressively cutting taxes would, in the short term at least, put upward pressure on interest rates unless there was commensurate restraint on government spending. And that is an important reason why the tax relief which we will announce shortly will need to be phased in gradually, and increased as we get control over government spending.
Michael Cullen is also trying to imply that a National Government would push up government debt in an irresponsible way. Well, he’s wrong here too. But at the same time a National Government will not be afraid to borrow to finance much-needed infrastructure, such as roads to reduce congestion and fatalities, if that makes sense in terms of the overall well-being of the New Zealand people.
The question Michael Cullen needs to answer is this: if hardworking New Zealanders can’t be given some tax relief under current conditions – when the government has a huge surplus and a large surplus is projected to continue for as far as the eye can see – under what circumstances would tax relief be justified?
Copyright © 2024 Don Brash.