Recovery gives NZ tailwind to rebalance economy, cut taxes

Thursday 20th May 2010

Finance Minister Bill English has unveiled a milder public debt blowout in coming years as economic recovery gives the government confidence to shift more of the tax burden onto consumption.

Net debt is forecast to peak at 27.4% of gross domestic product in fiscal 2015, a year earlier than had been projected in the half-year update, which had debt reaching 30.4% of GDP by 2016.

English’s 2010 budget will hand New Zealanders combined personal, company and investment tax cuts amounting to $17.9 billion over the next four years. Raising goods and services tax to 15% from 12.5% and tightening rules for property investors and foreign investment means the loss of revenue to the Crown is reduced to just $415 million.

The government is taking “a once in a generation opportunity to change the direction of the economy,” English said a media and analyst briefing in Wellington. “We’re changing the incentives at the margin – it’s not shock treatment for the economy.”

New Zealand emerged from the global financial crisis in better shape than most of its OECD peers, with only Australia and Poland managing smaller falls in real output. Demand from Australia and China, rebounding commodity prices and end to the net outflow of migrants have put the economy on a stronger footing than the government was expecting just six months ago.

The Treasury has lifted its forecast for GPD growth to 3.2% for the year ending March 31, 2011, from the 2.4% pace it projected in December. Taken over the four-year forecasting horizon, core Crown tax revenue is now expected to be $65.4 billion, or $1.6 billion more than was flagged six months ago.

English said cuts to personal and corporate tax rates and an offsetting hike in GST is aimed at addressing economic balances that are “deep seated” in an economy where property “still represents the largest single investment for most New Zealanders.”

The biggest tax reforms since GST was introduced in the 1980s will knock back the top tax rate to 33% from 38% starting Oct. 1, while the rate for incomes between $48,001 and $70,000 reduces to 30% from 33%.

From $14,001 to $48,000 the rate falls to 17.5% from 21% and the lowest rate, for incomes below $14,000, falls to 10.5% from 12.5%.

The hike in GST is offset by increases in NZ Superannuation, Working for Families and benefit payments.

The tax changes leave an average wage earner $15 a week better off, and families will have an extra $25.

Among new spending approved in the budget:

• An extra $2.1 billion for frontline health services over the next four years including $417 million in the current year.
• An additional $1.4 billion on schooling and early childhood education.

More Budget coverage:

Finely balanced tax package depends on growth dividend

Biggest tax package in a generation builds on lessons of global crisis

Property depreciation write-offs: here today, gone tomorrow

Government closes loophole and aligns tax rates for LAQCs

Government cuts tax on savings vehicles to 28%

Indexation loss tightens screws on Working for Families

Businesswire.co.nz

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