Tuesday, March 26, 2024

David Farrar: NZ’s problem is too much spending, not a lack of tax

Labour and Greens in 2017 campaigned on capping core crown expenditure at no more than 30% of GDP. This was their election pledge. At one Budget I asked Grant Robertson about the policy and he (admirably) replied it was a limit, not a target.

The latest forecast had expenditure at 33.4% of GDP. That 3.4% difference is massive. It is $14.3 billion.

If Labour had kept to their 2017 promise (the temporary increase in 2020 for Covid-19 doesn't justify it still being this high in 2024) then there would be no need for expenditure cuts. In fact we would have a $5 billion surplus instead of a $9 billion deficit.

The tax take as a percentage of GDP has increased also. It is currently 29.1% (32.3% for all core crown revenue) or $122 billion and in 2017/18 it was 27.9% or $80 billion. So tax has increased $42 billion in nominal terms and as a percentage of GDP it is $5 billion a year higher than it was.

Part of this is because of fiscal drag. We have an intolerable situation where people who do not work and are on welfare get their welfare payments indexed to inflation, but working people do not get tax brackets indexed, which means you net income drops due to inflation even if your gross income stays the same in real terms.

In April 2011 a worker earning $70,000 paid $14,020 in tax or an effective rate of 20%.

In December 2023, a worker earning the equivalent of $70,000 in April 2011 would earn $94,282 today.

The tax on $94,282 would be $22,033 on an effective rate of 23.4%. You have had a tax increase in today's dollars of $3,177.

What the government has promised in its budget is not tax cuts in the normal sense of the word. All they will be doing is partially refunding us for 13 years of tax increases.

The claim that spending has to be cut because of tax cuts is nonsense. Spending has to be cut because it exploded to $14 billion a year more than what Labour promised. This is why Labour was also announcing spending cuts just before the election.

The tax cuts will not restore us to where we should be. The person on $94,000 will only get a tax cut of $1,043 to compensate them for tax increases of $3,177. It is less than a third of the extra tax we have been paying.

The real solution is to treat tax brackets like benefits, and have them automatically adjust every year. If it is good enough for people not working to protect them against inflation, it is good enough for those who do work.

David Farrar runs Curia Market Research, a specialist opinion polling and research agency, and the popular Kiwiblog where this article was sourced. He previously worked in the Parliament for eight years, serving two National Party Prime Ministers and three Opposition Leaders.

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