Government spending is viewed as the best measure of the overall tax burden, since almost all government spending is ultimately financed from present or deferred taxation (borrowing). In addition, this measure is not distorted by whether the budget is in deficit or surplus.
Tax Freedom Day in 2010 and 2011 fell on 9 May, according to revised data. This year's improvement reflects the government's moves to constrain the growth in core spending, along with lower expenditure arising from the Christchurch earthquake.
This improvement may change, of course, when the government revises its forecasts in the 24 May Budget. The government has, for example, signalled that GDP growth is likely to be lower than expected before the election.
Tax Freedom Day arrived almost two weeks earlier in 2003 and 2004 on April 16. The delay in the arrival of Tax Freedom Day since then largely reflects the rapid growth of spending during the last term of the Labour government. The present government’s forecasts indicate only modest improvements in Tax Freedom Day through to 2015 when it is forecast to occur on 22 April.
While core Government spending is viewed as the best measure of our tax burden, it does understate the true situation because it omits or underestimates some elements of government expenditure such as the spending by local government. The OECD includes many of those elements in its broader measure of total general government spending.
For New Zealand, total general government spending is projected to be 43.5 percent of GDP in 2012. On this basis, Tax Freedom Day would fall on 8 June 2012 - some 22 days earlier than in 2011 (30 June). The calculation of Tax Freedom Day in 2011 was affected by earthquake-related expenditure. This year’s Tax Freedom Day of 8 June will occur slightly later than in 2009 (6 June) and 2010 (7 June), which provide a more reliable indication of the recent trend in Tax Freedom Day.
This broader measure highlights the extent to which New Zealand is a relatively high-taxed country. Compared with New Zealand, Tax Freedom Day on the broader measure comes over six weeks earlier in Korea (23 April), more than a month earlier in Australia (3 May) and Switzerland (5 May), and about two to three weeks earlier in Turkey (12 May), the Slovak Republic (18 May) and Estonia (23 May). Tax Freedom Day will occur in a further six OECD countries, including the United States (30 May) and Japan (3 June), before it arrives in New Zealand.
Tax Freedom Day for the OECD as a whole (7 June) falls a day earlier than in New Zealand.
A number of fast-growing Asian and other countries have levels of government spending, and hence tax burdens, that are well below the OECD average. Their advantage has increased in the recent past as they have not generally increased spending to the same extent as developed countries.
In their briefing to the in-coming government, Treasury warned that ‘the increasing mobility of global capital and New Zealand workers - together with the downward trend in international company tax rates - continues to apply pressure to the competitiveness of New Zealand’s personal and company tax rates’. They recommend on-going reductions in government spending along with further tax cuts to improve incentives to work, save and invest.
The government has an ideal opportunity to follow Treasury’s advice in the upcoming Budget. By lowering the tax burden on New Zealanders, living standards would be improved and Tax Freedom Day advanced.