How to crash the budget

The fiscal neutrality or otherwise of the 2010 tax changes is important because it goes to the heart of the economic competence of National.  They claimed the cut to income tax for upper income earners plus the cut to the company tax rate was balanced by the increase in GST and other tax changes. That is, they were broadly fiscally neutral.

If the tax changes were not fiscally neutral, then it undermines National’s credibility and it undermines their whole argument that we have to cut government services because there isn’t enough money. And it also means that the Government is having to borrow to pay for upper income tax cuts.

So I questioned John Key in the House yesterday over this repeated claim that the 2010 tax cut package was fiscally neutral.

The exchange ended with the two of us waving around different pieces of paper: I had a series of numbers from Treasury. John Key had a memo from his Finance Minister.

Let me present my evidence in three steps:

1. Treasury have consistently reported that the 2010 tax cut package – the package that cut taxes for those on high incomes, lowered company taxes, and raised GST to 15% – is not fiscally neutral in the short-to-medium term.

When announced, Treasury estimated that the static four-year cost of the 2010 tax cut package would be $1.1 billion. (See the original table on page 8 of the Minster’s Executive Summary in Budget 2010.) You will see that the projected cost in just the first financial year was expected to be about half a billion.

2. Just nine months after the tax cuts had taken effect, Treasury had significantly revised their initial estimate of the fiscal impact of the tax cuts. Within nine months, the net cost of the 2010 tax package was close to $1 billion, or double the initial estimate. (You can see the original table here on page 8.) The gross cost of the tax cuts was $2.7 billion but this was offset by a $1.6 billion increase in GST.

3. Yesterday, the Financial Statements of the Government of New Zealand for the Eight Months Ended 29 February 2012 were released showing tax revenues had collapsed even further due to the weak economy. Treasury reports a further $369 million shortfall in GST revenue, a $200 million shortfall in income tax, and a $193 million shortfall in corporate tax. This indicates that the cost of National’s 2010 centrepiece tax cut package has crashed the Government’s budget even further.

This is not a smart way to manage the Government’s finances. What household would slash their income sources when times are difficult, thus throwing themselves deeply into debt?

Here’s what’s happened to Government revenues (as a percentage of GDP) over the last few years.

And here, likewise, is what’s happened to Government debt.

It is true that the difficult economic conditions have put downward pressure on the tax take. But that is not the issue. The issue is, given the economic conditions, are the Government’s books in a better or worse position as a result of the 2010 tax changes? The answer is very clear: The deficit is much worse because of the 2010 tax changes. They were not fiscally neutral and the Government is having to borrow to fund the tax cuts to upper income earners.

In many ways, the Government’s dire financial position was of their own making.


(1) Note that they try to reduce the projected cost in the line in the table “adjustment for macroeconomic effects” by claiming that tax cuts cause GDP growth which increases the tax take (think Reagan’s J curve), but given what actually happened to the tax take, we can safely ignore their Reganomics.

6 Comments Posted

  1. Something I have been saying for years, National are simply borrowing to pay for tax cuts. Borrowing money to give to the richest people in your country lacks morality and intelligence. Do your graphs remove the borrowing caused by the Chch earthquakes?

    The other thing about this is even if the cuts were “broadly fiscally neutral” they impact the poor dramatically more who have to spend a much greater percentage of their income buying goods and services. A person on a lower income probably spends 95% of their after rent income on things that attract GST. A richer person probably only 30%. The person on the lower income is going to be hit much harder with a GST increase forces their 95% up to 97% as opposed to the richer whose share will rise to 31%. This was a regressive tax policy. Particularly when the cut to the top tax rate meant a massive decline in the rich peoples tax and a marginal decline in the poors.

    I can’t believe people can’t see through the talk of National. All the numbers are there that they are mismanaging the economy. They quote pie in the sky figures when they announce a new policy and when reality shows numbers so dramatically different you know someone was simply guessing. But when the real numbers show a continuing trend of slashing taxes from the rich and taxing the poor more you start to realise they aren’t so stupid after all – just self interested.

    Russel, this should be something everyone in NZ is aware of and needs public discussion. You don’t need to be a rocket scientist to understand it, probably to only have done 5th form maths. Please please please get this into the media spotlight somehow, its the only way people will see Nationals true colours.

  2. So the government cannot afford the $150Mpa to afford 6 months parental leave?


    1. implementing a tax revenue nuetral change involving a $250Mpa short term budget deficit for 4 years (1B).

    2. its budget forecast looking at a higher rate of budget deficit than forecast – maybe $500M pa.

    3. continuing to offer tax credits costing $500M pa for Kiwi Saver accounts (half the former $1B pa cost). The $1000 start-up and employer contribution should suffice for employees.

  3. Heard you on natrad, Russ, you come across very well. Measured, knowledgeable, principled. Keep it up!

  4. It was predictable – those receiving the top rate tax cut would not be spending the money, but saving it. So the GST increase forecast would be overstated and falling interest rates (and the continued lack of a CGT) would limit any rise in income tax return to government.

    Others in government especially would be paying down debt while they have jobs and before interest rates rise (witness the lack of people at Wellington stadium events).

    The government’s constant retrenchment response to its own policy imbalance only exacerbates it. The government is left awaiting the rebuild after an earthquake as its only way out of an impase of its own making. We have all the borrowing debt of a “spendthrift” government and yet no money was spent on anything. It’s the worst of all worlds, unless your ideological goal is to extract wealth and privilege for the few while diminishing government providing for the many.

  5. I’ve voted National for most of the last 50 years. In 2011 I switched to Green. Your excellent post highlights a small part of my disgust with the National Party. Their growth projections were total rubbish long before the election and anyone with an iota of economic credibility (that certainly excludes Key and English) knew it.

    Treasury’s growth predictions were complete bollocks just as they have been every year in recent memory, and we all knew it, but these duplicitous sods based their whole budget and their growth forecasts on such garbage.

    The system is totally dysfunctional and until such time as the education system, the media, the Green Party and astute public figures can improve the basic economic knowledge of a whole lot more voters we’re doomed to continue our slide into the Third World.

    The Secretary of the Treasury got one thing right. His predictions of the net outflow of our best and brightest to Australia.

    It’s disgusting.

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