Kiwis are the ones who will pay for tough economic times

Thursday, 4 June 2020

More than a thousand protesters joined the 2020 School Strike 4 Climate strike in New Zealand, but most did so from home with Covid-19 restrictions preventing large gatherings.

OPINION: The Government’s 2020 Budget projects a path of falling income and massively increased expenditures over the next four years.

Deficits totalling $106 billion and total debt of $200 billion or 54 per cent of New Zealand’s annual GDP are forecast. The planned borrowings are an increase of $140 billion on pre-Covid-19 Government debt levels, which were $60 billion, or 20 per cent, of the country’s annual GDP. Another useful comparison is that at the height of the Global Financial Crises/ Christchurch earthquake period, Government debt peaked at $62 billion, or only 24 per cent of GDP.

Total Crown net worth catapults down from $137 billion to $33 billion.

While even those numbers are deeply troubling and put us in uncharted territory, many economists believe they are optimistic. The 1992 US political quip “it’s the economy, stupid” has never been more applicable than right now.

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David Patterson is a corporate tax expert.

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Prime Minister Jacinda Ardern, Greens leader James Shaw and Finance Minister Grant Robertson walk to the house during Budget 2020 delivery day at Parliament.

Though a larger than normal 'safety net' is justified to meet the current crisis it should be targeted to help those most adversely affected – huge economic harm has been caused to many Kiwis and their businesses by the Government lockdown.

Where possible, Government should bring forward essential and quality infrastructure investment and any other spending that truly will make the New Zealand boat go better and faster. But it is not a sole operator – it should not crowd out other participants in the economy but work in partnership with the private sector, local government, and not-for-profit entities.

Tax increases aren't a simple answer – they will only hurt Kiwis and handbrake the country's economy, says David Patterson.

Proper cost-benefit and return-on-investment analyses are more important than ever. All Government spending should be tested for effectiveness – it is not just a case of adding on to what is already there. The 2020 Budget assumes pre-Covid-19 expenditure paths remain intact and Covid-19 expenditure is simply added on top.

New Zealand will have to pay the piper eventually for the Government spend now, and the people who will pay are taxpayers - whether that's workers or business owners. It is all of our futures that are about to be mortgaged. We will pay with future increased taxes and lower spending on core social services.

Over time the tax take naturally increases and jobseeker benefits reduce as the economy turns upwards, so tight control of future spending will see surpluses return and Government debt repayments reduced. But this requires Government discipline and takes a long time where debt is large. This makes it all the more important that spending now is of high quality and constrained as far as possible.

We rely on the government to provide a buffer in bad times, in part because levels of private debt in New Zealand are high. The buffer role needs the Government to progressively pay debt down to more normal levels, so there are sufficient resources to protect us from the next economic downturn.

Future governments may also be forced to consider increases in taxes. But the following analysis makes it reasonably clear that there are no easy targets sufficient enough to produce a $100 billion increase in revenue over a 10-20 year period. Significant additional taxes risk inflicting real pain on voters and imposing a handbrake on economic recovery.

Personal income tax increases could only realistically be imposed on those on the top marginal tax rate at levels well above the $70,000 threshold as broader based increases would create real cost of living issues for most of the electorate.

Our headline 28 per cent corporate tax rate is already high by OECD standards and, although in the post-Covid world other countries’ cororate rates may over time increase, there is no real scope for large corporate tax rate increases without affecting our competitiveness.

A GST increase above 15 per cent would especially harm our lower income earners who spend most of the money they have and is therefore not advisable or would need to be accompanied by increases in welfare payments.

Capital gains taxes, or inheritance /wealth taxes, or an annual land tax have proven and will prove politically challenging. A temporary 5-10 year Covid-19 surcharge income tax would also create real cost of living issues if broadly applied. Excise taxes (on cigarettes, alcohol, petrol) are already high and have higher impact on lower income groups.

With good health outcomes so far but a looming economic downturn and unemployment on a scale not previously seen, the economy is the key issue for this election. The track records and potential of the contestants should be carefully measured by voters in choosing the way forward.

David Paterson is the National Party candidate for Rongotai and a leading corporate tax expert who was also a member of the 2001 Cullen Tax Working Group.