NZ 2025 Taskforce Unveils Recommendations

by Mary Swire, Tax-News.com, Hong Kong

01 December 2009

New Zealand’s government has previously expressed a desire to close the country’s 35% average income gap with Australia by 2025. Established last year and named after that vision, the 2025 Taskforce has issued its first report, including recommendations for substantial tax reductions and changes.

The report notes that there has been a huge increase in government spending in New Zealand since 2005, reversing much of the fall achieved over the previous decade. Expressed as a share of GDP, public expenditure rose from about 29% in 2005 to around 36% now.

The economic case for much of the new spending, it argues, is poor. For example, it points out that there were no apparent economic benefits for either making student loans free of interest or the trebling of subsidies for early childhood education and day-care. Together the two subsidies cost some NZD1.5bn (USD1.1bn) annually and are of most benefit to the taxpaying middle classes.

The taskforce’s view is that increasing spending on that scale has meant passing up the opportunity for tax cuts that would have improved New Zealand’s long-term performance. In fact, to cover the increased spending, governments have had, instead, to effectively increase taxes.

It is calculated that, while the present top marginal income tax rate is presently 38%, the interaction of the higher marginal income tax rates and the abatement rules for the Working for Families scheme means that many middle income working families with children are facing effective marginal tax rates of 53% or 58%.

Unsurprisingly, given the above, the key elements of the taskforce’s proposed approach are significant cuts to both government spending and tax rates. It says that, if government operating spending as a share of GDP could be reduced back to the level that prevailed in 2005, the public sector deficit would be closed, and there would be scope for deep tax cuts.

It explained that: “For example, for an annual cost of NZD7bn, the top personal tax rate, the company tax rate and the trust rate could all be aligned at 20%. But there are alternative approaches: for example, the same resources could be used to fund the sort of dual rate system adopted in a number of European countries, in which the tax rate on capital incomes could be set much lower than labour tax rates.”

Other recommendations in the wide-ranging analysis include early reductions to the actual and prospective costs (as a share of GDP) of New Zealand superannuation; increasing the eligibility age and indexing payments to the inflation rather than to after-tax wages. All remaining KiwiSaver subsidies should also be abolished.

In addition, it concludes that congestion charging should be introduced in central Auckland and in any other cities where a cost-benefit analysis supports doing so. Full road-user charging, differentiated by place and time of road use, should be introduced as soon as it becomes economically efficient to do so.

The official reaction to the Taskforce’s recommendation was that the ideas were welcomed as part of the on-going debate on New Zealand’s tax system and would be considered, along with others, as the government puts together its 2010 Budget.

The Finance Minister, Bill English, observed that: "The taskforce's report issued today raises some interesting ideas and challenges, which will hopefully generate constructive debate about options for improving New Zealand's economic performance. We must consider a range of options if we are to get the investment, economic growth and new jobs needed for that to happen.”

Bill English also pointed out that the 2025 Taskforce is only one of several review groups that have already reported to the government or will report back in the next month or so. In particular, the Tax Working Group is due to present its report shortly.

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