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Economic conditions restrict tax cuts

By Lawrence Johnston

THERE will be no change just yet to personal taxes. Stressing this at an Ernst & Young Tax partners' and managers' breakfast last month, Finance Minister Michael Cullen said the room for change to personal tax rates had been constrained by fiscal and economic conditions.
In recent years government spending priorities had been considered, then as the economy continued to grow strongly, the government had had to be careful not to exacerbate imbalances that had built up.
In the seven and a half years since Labour had been elected, the government had invested heavily in priorities such as infrastructure and restoring the health system.
On taxation, the priority had been to lift struggling families out of poverty. The Working for Families package, which came into full effect this year, had made a "significant" difference to families who needed it most.
A recent OECD study had shown that a family on the average wage with two children, paid one of the lowest tax wedges in the developed world.
The Business Tax Reform Package - building on other business tax reform - had been the next priority, because the government had needed to lock in higher productivity and stronger economic growth.
For those who criticised the government for not cutting taxes, they needed to remember that tax relief since Budget 2004 - from business tax changes, Working for Families and KiwiSaver - had totalled NZ$2.8 billion this year, rising to NZ$4.5 billion in 2010/11.
As he had noted in the Budget, if the government had also attempted to cut personal taxes this year, the pressure on monetary policy would have been very serious.
The Reserve Bank would certainly have responded with interest rate increases that would have removed most of the value of any tax cut, and New Zealand's exchange rate would have risen even higher.
He expected some of those economic pressures to begin to ease as a rebalancing took place between the nation's strong domestic demand and the external sector. By the budget next year Dr Cullen expected to be able to outline the long term taxation programme.
The priority would be to ensure continued growth in the economy, and that the government prepared for the challenges ahead and provided for the nation's most important needs.
"I am confident that changes in the tax environment this year will help to prepare New Zealand to be a dynamic, connected economy able to meet those challenges," Dr Cullen said.