Parliament’s Finance and Expenditure Select Committee has just released its report on the half-yearly Budget Policy Statement.  This  politely worded document contains some useful nuggets of information that arose from Bill English’s testimony to the committee, and summarises FEC members’ views of what they heard.  Some of it was reported at the time, but it is worth reiterating in the context of the broader tax reform debate.

1. English reiterated that the tax pacakge will be fiscally neutral.
2. Raising GST to 15% is the government’s intention.
3. This was not presented as a “revenue raiser on its own” but was needed to help pay for cuts to tax rates.
4. The main rate change would be at the top end, with likely alignment with the Trust rate at 33%.
5. Although there was talk that middle and lower income earners would be “no worse off”, committee members pointed out the huge inequity of top rate reductions for the few, versus standstill at best for the many.  There is no disguising the relative shift of the tax burden.

FEC members pushed on how the government would achieve fiscal neutrality given its stated intentions to compensate for GST – the numbers did not appear to add up.    Mr English first disputed the Tax Working Group’s estimates (funny how when he agrees he quotes them) that show full compensation costs almost all the extra revenue increased GST raises; then said rate cuts woul be largely funded from taxes on property.

Having excluded a comprehensive CGT, Land Tax and RFRM, the amount able to be raised from changing building depreciation rules is insufficient (only $0.3 to $1 bn compared to a revenue requirement of $1.2-$1.5bn ).  So if the government cuts the top rate as much as they’d like, it doesn’t leave a lot left over for the great majority of taxpayers.

Mr English then wriggled around on what a partial CGT might look like – discussing a bright line test to change the “intent” rules around property speculation.  English has also proposed “ring fencing”, a measure that he has ridiculed in the past as a ‘disastrous’ proposal.(http://www.hansard.parliament.govt.nz/Documents/20070621.htm )

It is very debateable whether that would fix the tax inequity between investment classes.  It is even more dubious to suggest that the additional property taxes would all be borne by top tax rate individuals – what about retirees and middle income earners with one or two investment proprties who may need to sell up? It looks like the intervention into the property market will really be a revenue gathering exercise to pay for tax cuts to the top rate, rather than a principled approach to addressing distortions as English claims.

And nowhere in the MOF’s presentation was there any talk about closing down the other tax planning rorts.  Funny that.

More broadly, the government cannot escape the contradiction that:

1. It says it has enough revenue to deliver big top rate tax reductions for the few (but not the many).
2. But it will drastically reduce new spending to $1.1 bn in Budget 2010 and onwards - inevitably resulting in real front line service cuts to Health and Education.
3. There was no discussion of restoring superannuation pre-funding, Kiwisaver incentives,  restoring contributions to the SuperFund, or R and D tax credits, even though Treasury has previously advised all are prudent and necessary.

My impression of Bill English’s presentation was that no matter how it is dressed up, the government’s intentions are stark and predictable: raise taxes for the many and cut them for the few, and cut services for the many to pay for it.