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Budget FAQs #5: Growth Hockey Stick

Posted by David Cunliffe on May 19th, 2011

The New Zealand economy has failed to fire under National.  As a result successive rosy Treasury forecasts have been revised downwards.  The starkest example is between last year’s May Budget and December Half Year Update.  

  2010 GDP Track Revision

Implications: The  growth upturn “hockey stick” just keeps getting pushed out into the future.  The so-called GST tax switch had no discernable positive impact on growth.  And the same rosy forecasts will be embedded in today’s Budget.  On this track record Budget 2011 growth  projections will not be worth the paper they are written on.

When the 2009 growth projections are added the picture gets even more interesting.  As this graph shows the actual GDP growth track has been so bad that it is back down to the proections made by Treasury during the darkest days of the 2008/9 global financial crisis.  

   2009-2010 GDP Track

In other words, despite the international crisis having passed 18 months ago and NZ receiving record prices for our agricultrual commodities, our economy has performed so badly that it is back down to the track Treasury predicted during the darkest days of the crisis.   Quite simply, whatever the Govt has been doing is not working. 

In a future post we will decompose the relative impact on debt of this under-performance and otehr factors like earthquakes.

There is no coherent plan from National on how to manage debt reduction alongside needed investments in economic and export development, closing the savings gap, repairing the damage to middle New Zealand, and giving all Kiwis hope and confidence for the future.

Labour has an integrated economic strategy that will achive that withi a fully costed programme that will reduce net debt over a 10 year economic cycle.  You can see the direction we are heading in set out in a recent speech I gave to Business NZ  here.

For the wonks among you, here is the underlying data – all the Government’s own numbers.

  GDP per capita, 95/96 dollars    
 

Actual

Half Year Update 2009

Budget 2010

Half Year Update 2010

30/12/2008

7,805

      

30/03/2009

7,700

      

30/06/2009

7,683

7,683

    

30/09/2009

7,677

7,694

    

30/12/2009

7,716

7,721

7,716

  

30/03/2010

7,741

7,741

7,758

  

30/06/2010

7,734

7,768

7,802

7,734

30/09/2010

7,701

7,795

7,909

7,747

30/12/2010

7,694

7,830

7,883

7,799

30/03/2011

  

7,873

7,928

7,859

30/06/2011

  

7,916

7,973

7,904

30/09/2011

  

7,967

8,026

7,948

30/12/2011

  

8,027

8,088

8,010

30/03/2012

  

8,055

8,118

8,039

30/06/2012

  

8,091

8,156

8,085

 Sources: Budget relevant documents and Statistics NZ series

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Filed under: Budget, Cost of Living, Global financial crisis, Inflation, Investment, Tax, business, debt, economic, economy, finance, jobs, monetary policy
14 Comments

Introducing…Megan Woods

Posted by A Guest Poster on January 7th, 2011

In 2011, Red Alert will do a few new things. One of them is to introduce you to some confirmed Labour electorate candidates who will do the occasional guest post.

This will give them the opportunity to put forward some ideas and you the opportunity to get a sense of who they are before the upcoming election.

Today’s guest poster is Megan Woods, the confirmed candidate for Wigram.
Megan

In late December, after a year of extraordinary upheaval in Christchurch, I attended a meeting of small and medium business owners who are severely affected by the earthquakes of the last months. Emotion and tension were high in the room. Business owners, many of whom had seen their turnover fall by as much as 50 percent, were justifiably upset at the Government’s latest response to their plight. A $500,000 package, much of which is devoted to advice, is not what these businesses need to keep trading and importantly keep employing their staff. Cash flow advice for people with severely slashed turnover is not the action that these business owners were looking for.

A couple of days after this meeting, All Black Coach Wayne Smith drew national attention to the closure of the Conductive Education Unit based at Addington School. Funding of $29 000 is being withdrawn from the South Island’s only dedicated facility for children with severe disabilities. This slashing of front-line funding was a local manifestation in the Wigram electorate of a $2.5m cut to Special Needs education in Budget 2009.

Unfortunately these two local issues are not isolated. In the last several months we have seen the closure of a hospital in Taihape with those who relied on its services being farmed out around the North Island. From February this year, many families will face an increase of up to $80 per week in their bill for Early Childhood Education. We are seeing District Health Boards bracing themselves for budget cuts of up to 10%. These are another three examples of the National-led Government’s penny pinching and they are inevitable given its approach to economic policy.

Looking ahead to 2011, New Zealand is facing the very real prospect of a double-dip recession as a consequence of the Government’s failure to stimulate the economy. The families who rely on the Addington Facility, the business owners in Christchurch, the patients in the Taihape hospital and the parents of young children are paying the price for the National Government’s determination to give the highest-earning New Zealanders a tax cut paid for in-part by reducing spending on essential services. What I am seeing, both in the electorate of Wigram and in the country more broadly, are the real consequences of this Government’s misguided economic policies. Daily life is getting harder and harder for ordinary New Zealanders.

I am proud to be one of the many who will be spending 2011 seeking to put an end to this mean-spirited Government. 

Megan Woods was born and raised in Christchurch and is the younger of two children. She has a Ph.D in New Zealand History from the University of Canterbury. For the last five years she has worked as a business manager for Plant and Food Research.

Megan was selected as Labour’s candidate to contest the Wigram electorate in the 2011 general election on 19 September (Suffrage Day!) 2010.

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Filed under: education, health
21 Comments

It’s the little things that count…

Posted by David Cunliffe on December 7th, 2010

Sometimes it’s the little things that tell a big story.

Parliament is sitting in the press-Xmas period under the shadow of urgency to pass a rush of “priority legislation”. 

Guess what one of the top priorities is?  Abolishing gift duty.

That’s right, at a time when Kiwi families are doing it bloody tough, when the recession is biting this year worse than last, when top earners have had two rounds of generous tax cuts, and when the government is confronted by evidence of large scale tax avoidance, their priority is abolishing gift duty.

Making it easier to transfer assets to the trusts or the kiddies (on lower tax rates) above the existing threshhold of $27k each per annum.

Surely not a prioirty in the Mana electorate, not a priority in New Lynn, nor quake-ravaged Christchurch.

Surely not an example of personal responsibility – where everone pays their fair share.

Surely not bringing relief to the squeezed middle. 

For National it is clearly a prioirty to bring yet further relief to the top. 

Sometimes it really is the little things that count.

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Filed under: Tax, economy, perks
42 Comments

S&P: National on negative watch (part I)

Posted by David Cunliffe on November 23rd, 2010

National’s counter-spin on yesterday’s placement by Standard and Poor’s of New Zealand’s sovereign credit rating on negative watch shows increasing desperation, the latest of a torrent of bad economic news.  I comment in two parts: the announcement and the counter-spin.

First the announcement’s overview:

  • “We perceive New Zealand’s projected widening external imbalances and the country’s weakened fiscal flexibility as increasing risk to the sovereign.
  • New Zealand’s vulnerability to external shocks, stemming from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”

The S&P Report’s rationale makes the drivers even clearer:

  • widening external imbalances
  • weakened fiscal position
  • under-diversified economy
  • high external liabilities
  • a return to high current account deficits averaging 5.9% of GDP over the next three years.
  • and crucially, that “net external liabilities … predominantly reflect dependance by households on foreign capital to fund consumption and property investments”

In other words: New Zealand does not save enough, it has too much private debt, and that debt was used to fund the wrong things (property speculation not real business investment).  New Zealand’s exports are under-diversified and New Zealand will continue structural bleeding on our external accounts after the immediate recession.

The logical repsonse to these problems should be;

  • strong action to close the savings deficit (if possible by building good household saving behaviour)
  • diversify and increase exports (presumably moving beyond a narrow range of bulk commodities)
  • managing the fiscal position to encourage sustainable growth, employment and healthy tax revenues without blowing the fiscal deficit.
  • ensuring monetary policy supports the direction of reform rather than acting against it.

It obviously should NOT include:

  • borrowing more for tax cuts to upper income earners that neither create powerful stimulus nor correct the underlying imbalances
  • reinforcing exisitng bulk commodity exports while reducing investment in innovation and R&D to divesify and add value to the export base
  • cutting back Kiwisaver; cancelling prefunding for the NZ Super Fund; and taking two years to set up a Savings Working Group (and even then proscribing a range of strong policy options)
  • pretending monetary settings are ideal when exporters face extreme currency volatility

Bill English and John Key declared S&P lifting their previous negative outlook as a” verdict’ on Budget 2009.

They should be straight-up enough to accept that S&P has now reversed its verdict.

After 18 months of National Government policies National can have only itself to blame.

In part II of this post we’ll check whther their rhetoric matches this reality.

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Filed under: Budget, IRD, Investment, Tax, bank, business, debt, economic, economy, finance, international, monetary policy
15 Comments

Systemic Market Failure?

Posted by David Cunliffe on September 22nd, 2010

When this country is in recession and Kiwi families are doing it bloody tough, I cannot bear to stand by and see rich and powerful private interests – whom I will not name at this point and this post is not about SCF – rorting the rules and using their clubs and networks to finesse processes.

It makes Godzone look like “the coldest banana republic in the world”.

For goodness sake interests associated with the Natural Dairy Crafar farms bid (potentially with Nat links) reportedly gave $200,000 to the National Party while the Natural Dairy application was still before the OIO and while National has a ministerial policy review underway. 

National should IMMEDIATELY reject that bid – otherwise what is left to separate this from complete corruption?  Brown envelopes?  Is David Garrett really the only sick or crooked puppy on the Govt benches? 

Was it OK for the OIO-overseeing Minister of Finance to lease his (trust’s) house to the govt for a staggering ministerial rent, or accept hours of free TV for his “Plain English” ads?  Isn’t it time we Kiwis stood up and demanded that the tories do sweat the small stuff like the rest of us?  Isn’t it time John key held SOMEONE to account for SOMETHING rather than smile, wave and make excuses?

The Fendalton and Queen St methods are different from the Crafar one but they are even more dangerous and subversive: very polite circles of influence in the clubs and boardrooms - with massive flows of funds through anonymous trusts that violate the intent of the Electoral Finance Act.  Prestigious law firms and lobbyists.  This is up with the worst sort of influence peddling  I saw in Washington D.C. -  One dollar one vote:  permanent plutocracy unless we fight back.

Beyond political donations, look at the ability of the rich and powerful to get their way while the poor and middle struggle: $2 billion a year of tax avoidance through LAQCs and trusts that National in government has refused to touch.  Half the top 100 welathiest NZers are still not on the top tax rate!

This post is not about SCF, but researching that issue has opened my eyes to the complexity of the company and accounting structures in daily use around the markets.   One prominent international investment broker told me he tells his clients never to invest in NZ other than through an ASIC-regulated (Australian) vehicle, because our market is a wild west.

Well what is the point of getting our savings rate up (and asking hard working families to go without consumtion) if the investment vehicles we need to get the money to our struggling firms are being milked and siphoned by fees and sweet deals to the cronies in the markets?  Why would any sane Kiwi sweat 80 hours a week to build a real business here?  Where will our kids choose to live?

We are talking the need for a full scale root and branch reform.  For example, is the Trustee model not a fiction?  Issuers want tame trustees; trustees want clients.  How do you prevent a race to the bottom?  I will wager now the FMA Bill will not do the job.  We have BIG problems here folks. 

It might have been cool to point the finger at Labour when the champers was flowing during the bubble hype days; but corporate influence peddling is about as attractive as a bucket of sick in the middle of a recession.

There is a real risk of systemic market failure in the NZ financial markets.     They remind me of telecommunications markets in the 1990s – time for a big cleanup.

It is not right and not fair on the silent majority who play by the rules and who are getting absolutely screwed. 

It will only get worse until we have a Govt with the guts to stand up to it.   The smiling millionaire from Bankers Trust is hardly likely to do that!

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Filed under: Tax, Tax Working Group, Uncategorized, bank, business, civil liberties, democracy, economy, finance, inequality, journalism, national, perks, politics, privatisation
101 Comments

Budget 2010: UK Tory Style

Posted by David Cunliffe on June 23rd, 2010

It’s official and  it’s a shocker. Cameron’s first Budget puts VAT up to 20%. It cuts company tax cut from 28 % to 24%. Govt dept spending is cut by a staggering 25%. Capital gains tax is up from 18% to 28%.

A budget suplus in 3 years? – dreaming.  The social dislocation will be too awful to describe.

This is an uber-Tory Budget that relies on neoliberal economic ideology.

Given that Brown had already cut spending by GBP 72bn and this cuts another GBP 40bn it contains real risks of stagflation/deflation. If that spreads through a Europe bound together by linked currencies, it could  contribute to a double- dip recession that mayaffect us.

And of course we are now more vulnerable after Mssrs Key anad English borrowed more for unaffordable tax cuts.

For now, here is David Milliband’s reaction:

The Tory-Lib Dem Budget is a hammer blow to families and business across the country – and to the future of the British economy. George Osborne’s measures are driven by ideology not economic reality. And the price will be paid in higher unemployment and lower living standards for the poorest and those on middle incomes.

When they asked for your vote at the last election, David Cameron and Nick Clegg said they would reduce the deficit without hitting the frontline or hurting the poorest – but they have already broken that promise.

…

Below I set out what I would do differently – read on and then sign up to my Broken Promises campaign – help me show David Cameron and Nick Clegg that we will expose and oppose their Broken Promises every step of the way.

  1. I would make reducing unemployment a top priority. We must oppose the Tories’ decision to scrap Labour’s job guarantee, which provided work to the long term unemployed. The Tories are making the same mistake they made in the 1980s, of letting unemployment devastate lives and communities.
  2. I would not increase VAT, which is a regressive tax that hits the poorest hardest. Don’t take my word for it, David Cameron said it. And the Lib Dems promised to fight against a VAT rise until they decided to support it.
  3. We should be supporting the industries that will drive jobs and prosperity in the future – like Sheffield Forgemasters who have been robbed of a loan that offered world-beating jobs for Britain.
  4. The Tories’ four pounds of spending cuts for every one pound of tax rises is extreme. Even Mrs Thatcher went for a pound of spending cuts for a pound of tax rises. I would strike a fairer balance between reductions in spending and tax rises to reduce the deficit. If we need more tax let’s look at measures like a Mansion Tax on £2m homes not VAT rises.”

Sound familiar?

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Filed under: Budget, Foreign Affairs, Tax, economy, finance, inequality
86 Comments

BUDGET 2010: feedback so far

Posted by David Cunliffe on June 22nd, 2010

Hi RA readers – I’ve been off air a bit lately due to running around the country on the post- Budget speaking tour, and because my laptop died!

Today parliament shifted into a new stage of the Budget debate – the Appropriations Bill that legitimises the Supplmentary Estimates (amended spending lines) between Budgets 2009 and 2010.   It was remarkable for what it does not say – nothing about a plan for protecting  jobs or lifting incomes during the worst of the Great Recession.   No new ideas over there.

Quick feedback from the Budget tour: spoke to about 20 groups, a mixture of Labour-organised public meetings, community sector groups and businesses.  Hard to tote up exactly but would have seen close to 800 people face to face: groups of 160 down to about 25, plus individual business site visits.

The feedback was clear:  most Kiwis understand that by the time inflation of 5.9% next year eats away the tax swindle, and wage growth is held down, they will be worse off.   That includes increased govt charges like ACC and ECE, plus power bills, rent and higher mortgages.  The Government made the classic mistake of overpromising and under-delivering.   Kiwis hate the rise in GST.   They know the tax cuts aimed primarily at the wealthy are unjust and inefficient. 

Was it a coincidence the govt’s polling fell 5% in the week after the Budget?   

Second, businesses and commentators understand that the Budget lacks a real plan for jobs, incomes and growth.  Fiscal prudence matters, but it is no substitute for a strategy to address the yawning triple deficit around the savings gap, current account deficit and innovation deficit.  Gutting Kiwisaver, the R and D tax credits and NZSF prefunding made these worse.  The Govt’s innovation package, which represents only 39% of the value earlier striped out, has been almost universally panned.     

Third, the added debt from the unaffordable tax cuts has opended up $1.1 bn fiscal hole over 4 years, $9.2bn over 12 years, and that makes the job of turning the boat around ever harder.  National will seek to fill this “strategic deficit”  through asset sales and service cuts.  Don’t let them!

Future posts are going to broaden out somewhat to the rlated issues of monetary and fiscal settings that surround the needed economic strategy.

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Filed under: Budget, GST, Tax, blogs, business, economic, economy, finance, inequality, polling, science, wages
122 Comments

BUDGET 2010: English – A Fudge Too Far

Posted by David Cunliffe on June 1st, 2010

Good fun in the House today grilling Bill English here and here on why the Government’s online tax/benefit calulator leaves out the forecast inflation rate of 5.9% in 2010, and thus overstates benefits.  Its a blatant case of misleading the public.   The Speaker rules it is a straight question that deserves a fair answer: Bill English doesn’t get it, and digs a hole deeper than the original mistake…

…It would be funny except it has misled many average income Kiwis who were encouraged by the Govt to believe that the budget left them “better off”, when in reality it left them behind until at least 2014.   It will be no fun at the checkout queue for many hard working families.

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Filed under: Budget, GST, Tax, economic, economy, finance
50 Comments

BUDGET 2010: Jigsaw Pieces Click

Posted by David Cunliffe on June 1st, 2010

The jigsaw pireces of the Budget are starting to click in the public mind if recent polls are any indication.  In the last week :

  • The IMF described NZ’s savings gap and net international indebtedness as “among the largest of any advanced nation”
  • Analysis shows a $9.2bn additional fiscal hole in the Budget by 2023 arising from the tax changes
  • Budget documents show expenditure as a % of GDP falling from 33% to 28%
  • Bill English floats Kiwibank sale as one example of a number of SOEs ripe for partial privatisation.

In other words: give away taxes up front (very largely to their mates); run an out year deficit (deliberately); compress spending (as ‘prudence ” then demands); and flog off what is left of the family silver to fill the remaining gap (dressed up as mum and dad savings products, of course).

What does all this mean for the average Kiwi?

  • despite the govt spin, they are worse off for the next four years at least due to the toxic cocktail of GST, inflation, other govt charges and taxes, and slow wage growth;
  • public services like Heatlh and Early Childhood Education will be slashed as new spending lags inflation ($300m short in Health) or deliberate policy changes bite;
  • the outlook for public services gets dramatically worse as the National Party tries to resize the state to 28% of GDP – although they won’t want to talk much about that before the election;
  • the underlying economic problems reamin unresolved and get more intractable over time.   There is no credible plan for growth and jobs.

Moral of story: do NOT let National get a second term   Stop the malign juggernaut before it does irrepairable damage.

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Filed under: Budget, GST, Household income, Tax, business, economic, economy, education, finance, poverty, privatisation, productivity, public services
52 Comments

BUDGET 2010: Strategic Deficits and Fiscal Risks

Posted by David Cunliffe on May 27th, 2010

Budget 2010 was not fiscally neutral.  To fund its large tax cuts package of  $14.5 billion the government has borrowed an extra $1.1 billion over four years.

The Crown borrowing requirement rises and interest costs roughly double before declining around 2021.

The current account widens from 3% to 7% over the forecast period.  The trend in net internation investment remains negative.

Longer term the fiscal aggregates look even worse.  We will have more to say about this in due course.

Meantime the world around us is poised on the cusp of a potential double-dip recession.  Germany’s voters are tiring of socialising the Eurozone’s mounting deficits.  The US and UK are already running huge deficits and accumulating debt due in part to the last round of fiscal stimulus.

World markets are highly fragile.  Korea and the Gulf of Mexico mean we don’t need too much else to go wrong.

Why has National strained the fiscal envelope so far while achieving so little economic return?

Treasury forecasts less than 1% additional GDP growth from Budget 2010 measures accumulatng over 7 years.

(more…)

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Filed under: Tax, economic, economy, finance, inequality, poverty, superannuation
47 Comments

Latest stats prove Bill English wrong

Posted by Chris Hipkins on May 26th, 2010

Bill English made the wrong decision to cut contributions to the New Zealand Superannuation Fund (commonly referred to as the Cullen Fund). He had an opportunity to fix that mistake in this year’s Budget. He didn’t take it. In fact he’s even gone back on his promise to resume contributions once the Crown accounts move back into surplus. He’d rather leave the cupboard bare for future generations.

The latest population projections released by Statistics New Zealand clearly show just how short-sighted that decision is. The share of workers aged 65 and over is projected to grow from 12 percent in 2006 to 21 percent in 2061. More than double the number of people will be claiming NZ Super, not to mention the extra costs in healthcare. Instead of preparing for that huge demographic shift, John Key and Bill English have prioritised tax cuts that disproportionately go to those on the highest incomes.

English claims that he would be borrowing to make contributions to the fund. But he seems very happy to borrow to pay for tax cuts. In fact had he continued to contribute to the fund over the past year, he’d have made the Crown a tidy little profit. Since Budget 2009 the Super Fund has increased by $3.6 billion, and in the nine months to 31 March it gained $891 million more than Treasury forecast on its investment portfolio.

We all need to face some cold hard realities here. The ‘retirement boom’ will really start to kick in over the next 10-15 years. Absent significant changes, we can’t afford it. Those enjoying tax cuts today may get a rude shock in another decade when the then government has to make a tough decision between cutting entitlements or significantly increasing taxes to pay for them. No doubt by then our smiling and waving PM will have skipped off to Hawaii leaving that particular mess for someone else to sort out…

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Filed under: senior citizens, superannuation, workforce
17 Comments

BUDGET 2010: The Sucker Punch

Posted by David Cunliffe on May 25th, 2010

We all know Budget 2010 was full of broken promises – from NOT raising GST  – to being “fiscally neutral” while borrowing an extra $1.1 billion to fund tax cuts - to being “fair” while giving a third of all those tax rebate $ to the top 5%.

Most people now realise that the gains they thought they might get are more apparent than real:  the proof – even on the Governmnet’s own numbers average gross incomes don’t catch up with inflation unitl 2014!  That’s two elections away!

 Most now know the results are economically desultory – the current account blows out to 7% of GDP, growth is static (taking 7 years to accumulate a measley 1% extra), and what empoyment growth there is is largely unrelated to Budget meaures.  

What has become clearer as the debate has progressed is just how cynically National has attempted to buy votes through a Budget increasingly seen as highly political.   John Armstrong - who is no Labour acolyte to say the least – politely nailed that in Saturday’s Herald.

The game afoot is this: fool middle income voters into thinking they have a win.  Push through much larger tax cuts for the upper end under this smokescreen.  Deliberately stretch the government balance sheet by borrowing more to fund the cuts.  Begin compressing public services, but slowly, and hope the rosy glow lasts until the election…

But Bill English could not help the Freudian slip about selling off KiwiBank.  (As if anyone believes that a mom-and-pop share issue would mean shares didn’t end up in institutional hands eventually – remember Contact Energy?)

This is important as a foretaste of things to come: extensive privatisation of assets the public already owns, and deep Budget cuts to balance the books that this Government has deliberately run up by cutting taxes too far.   Both add up to shrinking the state, and with it the essential services that all Kiwi families need.

Budget 2010 is not a step change,  and not a step up.  It’s a set up - a sucker punch for the full flowering of the Right’s agenda should New Zelanders allow them a second term.

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Filed under: Budget, GST, Tax, Uncategorized, Unemployment, economic, economy, education, finance, health, inequality, public services
68 Comments

BUDGET 2010: Pass the Berocca

Posted by David Cunliffe on May 21st, 2010

After the beehive-spin induced euphoia wears off and the hangover sets in, middle New Zealand will reach for the Berocca and try to work out what the Budget really means for them.

Not to add to the inevitable headache, but here are a few of the facts of life for the morning after.

  1. For at least 3/4, and maybe 90% of the country, by the time they eat a whopping 5.9% inflation next year (Treasury Budget forecasts, not NZLP numbers!) they will be worse off until at lesst 2012/13.   For a family with 2 kids on $72k for example, $55 a week worse off.
  2. That inflation will feed into mortgage costs and rent rises.  It will result, quite rightly, in pent up wage demands from workers who have gone without wage rises for the last two years. 
  3. While its ok that the middle income brackets got some income tax relief, and would have likely got more relief from us, the tax cuts are way too skewed to the top.  You just can’t get around the fact that someone earning a $million a year gets $1000 a week back.  That is going to make the haves/have nots gap wider.  And that gap will inevitably worsen over time, undermining the Kiwi dream and taking us further from the “fair go for all” kind of place we want to be.
  4. That is made worse by the underlying agenda of shrinking the state and the services it can provide.  We have already seen home help for the elderly branded “low quality” spend and cut.  Health’s new money in the Budget is, we reckon, about $270 m short of standing still given next year’s inflation forecast.  That means more cuts to the services and more pain for the vulnerable.
  5. My personal gripe is early childhood education.  What has the Govt got against quality preschool education?  Why is it swiping $100m pa from that?  Labour will lead in this area and every family with young kids will hear us. 
  6. Rebalancing the econmy is way undercooked.  Take away the smoke and mirrors of the tax switch, and we are still left with residual taxt incentives for property and LAQC avoidance mechanisms.   Proof:  LAQCs sheltered $2.3 billion of taxes in 2008.  The tinkering in the Budget trimmed only $70m p.a. of that.  
  7. There is STILL no credible plan for growth in this Budget.  The National Govt seems intent in relying on “passive” instruments. I have no problem with dropping the company rate – provided the fiscal balance can support decent public services (personal view – see “About” on the blog site) – but that cannot be enough to get the export sector going on its own.  What about the R and D tax credits?

The strucutral problem remains: we don’t export enough, we don’t save enough, and we don’t innovate enough.  As an economy we are short on capital, technology, skills and IP.  Budget 2010 does not fix that.  Time is short and the job is urgent.  When NZ wants positive action, Labour will be ready to lead.

As the bubbly wears off in the Beehive and the Berocca gets passed around the country; the poor, the forgotten middle class and the structural problems of the economy have not been moved forward by this Budget.

It remains a suger-coated tax swindle.

It remains a step back, not a step up, and certainly not a step change.

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Filed under: Budget, GST, Household income, Labour Party, Tax, Uncategorized, business, community, economic, finance, health, inequality, poverty, productivity
88 Comments

BUDGET 2010: Broken Promises and Lost Opportunities

Posted by David Cunliffe on May 20th, 2010

Budget 2010 is a tax swindle, a lost opportunity and a massive broken promise to New Zealanders.

It rewards the wealthiest, but swindles the middle class by gobbling up their small change tax switch in the highest (5.9%) inflation in decades.

Most Kiwis tax cuts will be wiped out by inflation before they even get to the checkout.

By the Government’s own figures an average wage earner will be $30 a week worse off after inflation and a person on $70, 000 will be $45 a week worse off.

The tax cuts are unfair; a third goes to the top five percent and fifteen percent goes to the top one percent. People in the middle and bottom will go backwards after inflation.

The upper income tax cuts are unaffordable. The Government is borrowing an extra $450 m next year, and a billion over 4 years.

This Budget therefore breaks a string of hollow promises:

  • not to raise GST
  • to leave the “vast majority” of Kiwis better off – most won’t be after inflation and rent taxes
  • to be fiscally neutral: the Budget borrows $450 m next year to fund upper income tax cuts
  • to return to prefunding superannuation when in surplus (no prefunding until 2019, surplus 2016)
  • to compensate pensioners and Working for Families recipients for ST (this a one-off, not indexed)
  • to maintain Health and Education: wrong – Health is some $300m p.a short of keeping up. Education some $200m p.a short; including a savage $120m cut to Early Childhood Education.
  • to rebalance the property/business tax divide: this is underwhelming – building depreciation is partially taxed, but there is no ring fencing of losses; and the changes to LAQC and PIE rules are minor.

Overall the Budget fails both tests of fairness and growing jobs and incomes.

Lower and middle income earners are left behind while the top end reaps a windfall.

The old, the young, the sick and frail are left worse off.

The Government is borrowing to favour its mates, once again.

It is a tax swindle, a lost opportunity and massive broken promise.

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Filed under: Budget, GST, Tax, economic, economy, finance
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BUDGET 2010: Neither Fair Nor Fixing

Posted by David Cunliffe on May 20th, 2010

It’s Budget Day.  You’ll be hearing lots from us over the next few days and I hope many of you will join our Finance Team live here on Red Alert tonight at 8.30 pm.

Most New Zealanders already understand that a Budget that (at best) delivers only marginal gain to middle and lower income earners and a whopping great windfall to the top end, is not fair.  It is however, precsely what you would expect from National.

Equally important, the Budget as it has been foreshadowed will not fix the underlying problems of this economy: lack of savings, skills, innovation and exports.  These are exactly the themes Labour is pushing – as reflected in todays Dominion and Herald (note the Herald got the headline wrong).

If you don’t believe me on this – just refer to Swtizerland’s IMD World Competitiveness Ranking, which shows NZ slipping back for exactly the reasons Labour has been saying. 

Think about it, if the problems are insufficient savings, exports, skills and innovation, how on earth is raising GST and an income tax windfall for the wealthiest possibly going to address that?

It proves our underlying critique of this visionless National Government -  they had “nine long years” to think up policies to take the country forward, to deliver on the step change they campaigned for – and so far, nothing.

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Filed under: Budget, Cost of Living, GST, Tax, Tertiary education, Uncategorized, business, economic, economy, finance, food, low pay, politics, productivity, science
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Bollard in 1992 on the impact of GST increases on the economy

Posted by Stuart Nash on May 19th, 2010

Reserve Bank Governor, Alan Bollard, wrote a paper in 1992 titled “New Zealand’s Experience with Consumption Tax”.  It dealt with the implementation of GST in NZ.   He wrote “in 1989 when GST was increased to 12.5% the effect on retail sales and subsequently on growth was marked; after experiencing signs of a pick-up the economy dropped back to recession the following year”. 

When asked about history repeating itself in the FEC select committee today, Dr Bollard said that the impact of the proposed GST increase on the economy would depend on the total tax package balance.  Interesting.  Remember when GST was increased by 2.5% in 1989, kiwis at the top end had just received massive personal tax cuts in 1988: the top rate dropped from 48% to 33%. 

I hope for NZs sake, history does not repeat itself with this current budget, because it all looks awfully familiar.

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Filed under: GST, Tax, economic
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PM – “Don’t be jealous – rich are crucial to economy”

Posted by Stuart Nash on May 18th, 2010

Who is as insulted as I am over PM Key’s statement, reported in today’s Dom Post, around why the highest earners will get the tax cuts in this week’s budget, at the expense of the 92% who earn under $70k/ann (http://tinyurl.com/23natqb)? ”We can be envious about these things, but without those people in our economy all the rest of us will either have less people paying tax or fundamentally less services they provide”

Well, my daughter is taught by a teacher earning under $70k, most of the police who put their lives on the line for us earn under $70k, nurses who fix us up when we fall over earn under $70k, and the vast majority of people who actually make this country tick – the backbone of the nation – earn under $70k.  Are these people any less deserving?  Do they not ensure that the wheels of industry are well oiled, the streets are safe and our citizens are provided with the services required of a first world country?  Of course they do.!

How bloody insulting.!  As I blogged earlier this year, there are a myriad of reasons people live and work in New Zealand – and tax is way down this list.  These changes will, if anything, drive middle NZ across to Australia and further afield.  Mr Key – just be honest with Kiwis and stop feeding us your propaganda: these tax cuts are not about creating equality of opportunity, driving higher productivity, developing a fairer tax system or building more equitable society – because they will not achieve any of these goals.  If you believe they will, then I suggest you start studying your economic and financial text books and reading your case studies –  those published this century – not last.!

Don’t get me wrong, I am not saying that our high achievers are not deserving – they are – but so is everyone else.  The increase in tax through the GST hike to 15% is broad and all-encompassing – so should the tax cuts be.!

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Filed under: GST, Tax
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OCR remains at 2.5% – now economy v english

Posted by Stuart Nash on March 11th, 2010

The Reseve Bank has held the OCR unchanged at 2.5%.  In the quarterly Monetary Policy Statement that accompanies each OCR announcement (see URL below), Governor Bollard has said (amongst many things): inflation predictions are around 2%, (however, there has been no modelling done for the proposed increase in GST and the cut in the top marginal tax rates for the 8% of Kiwis earning over $70K); GDP growth expected to be around 1% per quarter, or 4% per ann; and employment expected to drop by around one percentage point a year.  This begs a couple of questions / points:

1. if economy is expected to grow at 4% per year, then surely Minister English can now afford to give state sector employees a decent pay increase this year – remember he said last year possible wage freezes for up to 5 years.

2. if inflation is expected to be around 2% per year (without having yet modelled the impact of GST increases or tax cuts for the top 8%) then this implies a further reduction in the purchasing power for those 70% of extra-ordinary hard working kiwis earning $40k or less. 

3. Surely, with inflation forecast at 2%, and GDP growth forecast at 4% per year, the minimum wage has to increase more than the paltry 25c / hr given by the government last year.  Mr English? Mr Key?

Come on now Mr English and Mr Key – you have signalled what you are going to do for the 8% of kiwis earning over $70k/ann – now tell us what you are going to do for the other 92% – apart from increasing costs through increasing GST…

http://www.rbnz.govt.nz/monpol/statements/

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Filed under: GST, Tax
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Henry review on Australian tax system.

Posted by Stuart Nash on March 7th, 2010

The Nats had the Tax Working Group and Australia had the Henry Tax Review.  Dr Henry is the Australian Federal Treasury boss. 

For some reason, Prime Minister Key and Finance Minister English have always operated under the assumption that the Henry review would recomend to the Rudd government that taxes should be cut - esp the company rate.   Key and English’s own tax working group also seemed to be operating under such an assumption. 

Dr Henry presented his report to Federal Treasurer Swan in December, and while the report has not been made public, Dr Henry said in a recent speech that the consequences of the aging population means that Australian’s will need to pay MORE taxes.  Mr Rudd has said that he is putting the Henry tax review on hold as he concentrates on major health reforms. 

Mr Key and Mr English seem to be stuck in a late 20th century economic timewarp when the rest of the world is concentrating on how to stimulate the economy by providing relief for those who actually need it – those 70% of salary and wage earners on $40k or less – those 800,000 New Zealand families with a combined household income of $60k or less.  How about doing something for these Kiwis Mr Key.!   Take a leaf from Mr Rudd’s book and put these tax increases for the many so as to cut taxes for the few on hold – then seek a mandate from the people in 2011 for such radical and unfair changes.  Go on.

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Filed under: GST, Tax, economic, finance
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Tax and the Budget Policy Statement

Posted by David Cunliffe on March 4th, 2010

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.

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Filed under: Budget, Cost of Living, GST, Tax, Tax Working Group, Uncategorized, economic, economy, public services, select committee
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