New Zealand’s Treasury has released its second Long-term Fiscal Statement, which looks at the issues of government spending, taxation, public debt and an ageing population, covering the next 40 years to 2050.
Under the Public Finance Act, the Treasury is required to produce a statement on the long-term fiscal position at least every four years. The Treasury emphasized that the statement is its document, however, and does not represent government policy.
"The fiscal outlook has worsened significantly since 2006, when the first Statement was produced," Secretary to the Treasury, John Whitehead, announced. "We already have budget deficits. If government spending follows historic trends, then these deficits would last beyond 2050, resulting in net public debt reaching more than 220% of GDP."
"The deterioration since 2006 shows the effects of the recession on tax revenue, increased costs in existing programmes and policy changes over the past three years," he continued. He added that the projections in the statement highlighted the challenges and choices around revenue and spending that governments may be confronted with over the next 40 years.
Whitehead explained that the statement was designed to generate public discussion about what is required to achieve a sustainable fiscal position into the future.
"A sustainable fiscal position requires the maintenance of budget surpluses over time. There are many mixes of spending and taxes that produce a sustainable position, but returning to surpluses will require choices about policy priorities."
Assuming that, as in the government's 2009 Fiscal Strategy Report, current tax settings remain in place until 2023, the structure of income taxes means that, if tax thresholds are not adjusted in line with real income growth and inflation, tax-to-GDP will increase to 30.9% by 2023 from around 29.5% now.
However, from 2024 onwards, the tax to the GDP ratio returns to a more average level over the remainder of the projection. Core government revenue is below spending throughout the projection, resulting in predicted deficits for the next 40 years.
Such budget deficits have to be covered by government borrowing. Although a portion of the deficits and resultant borrowing is presently attributable to the downturn in GDP, the statement identifies the key fiscal issue as being that persistent gap between government expenditure and revenue.
If New Zealand does not want increasing debt, then the statement says that increased taxes could play a role. But just as high public debt is recognized as unsustainable, because it becomes an increasing economic burden, the statement pointed out that higher taxes also come at a significant cost.
The largest of these costs, it argued, is that higher taxes limit economic growth. In addition, in a world competing for skills and investment, tax rates are also important factors in whether, as a smaller country, New Zealand will keep or attract the skilled people, capital and businesses it needs.
The statement expressed the belief that, from an economic growth perspective, New Zealand's present tax mix is unhelpful. Income taxes (both corporate and personal) have a detrimental impact on growth, while consumption taxes like Goods and Services Tax (GST) or property taxes have a less adverse impact. The GST rate of 12.5%, it said, is low by international standards and in comparison to the country’s income tax rates. There are no central government property taxes, nor is there a comprehensive capital gains tax.
New Zealand has the third-highest proportion of tax revenue raised from company tax in the Organization of Economic Cooperation and Development (OECD), and the company tax rate of 30% is higher than the average of 26% for small OECD countries.
Furthermore, the top personal tax rate begins at a relatively low level. Households (with children) in the bottom half of the income distribution effectively pay no income tax or receive tax credits, because of the interaction with the income support system. The top 10% of income earners pay more than 40% of all income tax revenues and about 20% of GST revenue.
The statement concluded that, to stabilize net public debt at a target of around 20%, the long-run tax-to-GDP ratio would need to increase by more than 3%. This would mean for individuals that, if this tax increase were to be achieved via increased personal tax, there would be across-the-board tax rate rises of 5.5%. Alternatively, if the increase were funded entirely through raising the rate of GST, it would need to increase from its current 12.5% to about 20%.
However, this increase in the overall tax take would also likely result in lower GDP. If other countries were also increasing tax to finance increased government spending, or if New Zealand’s taxes are really targeted at less mobile factors like land, then the effect could be less, the report concluded.
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