Order Paper and questions

Questions for oral answer

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House of Representatives
5 April 2012
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2. Tax System Changes—Fiscal Neutrality

[Sitting date: 05 April 2012. Volume:679;Page:1727. Text is incorporated into the Bound Volume.]

2. TODD McCLAY (National—Rotorua) to the Minister of Finance: What is the impact on the Crown’s finances of the Government’s tax changes since the 2008 election?

Hon BILL ENGLISH (Minister of Finance) : The Government has taken a number of steps to improve the incentives in our economy in order to encourage investment and savings, and create jobs. As well as that, in 2009 the Government cancelled tax cuts scheduled for 2010-11 that had already been booked in the Crown’s books. The 2008 election tax package and the 2010 Budget tax package both encouraged work and saving, and discouraged spending, borrowing, and property speculation. We made further savings in Budget 2011 through changes to KiwiSaver and the Working for Families tax credits. Overall, these changes will substantially reduce deficits and Government debt compared with the situation the Government inherited in 2008.

Todd McClay: By how much will the Government’s tax changes reduce deficits and debt?

Hon BILL ENGLISH: As we have explained many times, the total revenue effect of the Government’s tax changes was negative in the first 2 years—that is, 2008-09 and 2009-10. This provided appropriate support for the economy while New Zealand was in recession. However, these changes now collect more revenue, from 2010-11 onwards. In fact, taking into account all the tax changes made by the Government, it will collect $270 million more revenue in 2010-11, $1.5 billion more in 2011-12, $1.8 billion extra in 2012-13, and $2 billion more in 2013-14 compared with what was forecast when we became the Government.

Todd McClay: What are the reasons for tax revenue falling as a percentage of GDP since 2008, as noted by the Inland Revenue Department in its briefing to incoming Ministers?

Hon BILL ENGLISH: A good portion of that is due to the impact of the global recession. This reduced tax from banks, financial institutions, and investment funds, as well as PAYE and GST. To the extent that tax policy changes have reduced this percentage, they were, overwhelmingly, changes introduced by the previous Government, including a fiscally negative cut in the company tax rate, which it did not pay for until April 2008, and fiscally negative personal taxes under Labour in October 2008.

Dr Russel Norman: With regard to Budget 2010 and the tax changes in Budget 2010, was Treasury wrong when it projected that the fiscal impact of those tax changes would be negative $1.1 billion over 4 years?

Hon BILL ENGLISH: The Treasury forecasts were published at the time, and, as we said, the tax package was roughly fiscally neutral, with some cost in the first year, and turning to a positive impact by about year 3 or 4. Of course, the reason for those tax changes was fundamentally to bring an end to the bonanza of debt and spending that had driven the economy after change—

Mr SPEAKER: Order! The member just asked whether Treasury was wrong, not what the reasons behind the tax changes were.

Dr Russel Norman: I raise a point of order, Mr Speaker. You have very helpfully assisted members in understanding Ministers’ answers. Did the Minister say they were right or wrong? I could not tell from the answer.

Mr SPEAKER: It appeared to the Speaker that the Minister said those were projections at the time. The Minister appears to have given the House updated figures today. But I may be wrong in that matter, and the Minister should correct me if I am wrong in that interpretation. It appears that I am not.

Dr Russel Norman: Was Treasury wrong when it produced the Financial Statements of the Government of New Zealand for the financial year ended 30 June 2011 in which it gave figures for the updated impact of the 2010 tax changes, and the updated impact appeared to be twice as bad as the projections in the Budget, which would appear to be about $1 billion negative in the first 9 months of the operation of those tax cuts?

Hon BILL ENGLISH: The member continues to mix up the effect of collecting less tax from lower growth in the economy, or lower inflation in the economy—and sometimes both together—with the impact of tax rate changes. I might just point out to the House that the tax package has only just completed the first full tax year, on 31 March. It has actually been wholly in place for only 1 year, and it is a bit hard to tell from this close up just exactly what effects flow from the changes in rates and what effects flow from a slower economy or lower inflation.

Dr Russel Norman: I raise a point of order, Mr Speaker. I am sorry, the member may well have an opinion about my views on things and so forth, but I am interested in whether he agrees with Treasury’s figures or not. That was the essence of the question and I did not really hear whether he did or he did not.

Mr SPEAKER: If the Minister could give an answer in relation to those Treasury figures it would be helpful for the House.

Hon BILL ENGLISH: Of course we agree with the figures. They are a record of the Government’s accounts, and in that sense they are factual information. What we disagree with is the member’s analysis of them, although I would have to say that he is much more astute and persistent about these issues than the four economics spokesmen of the Labour Party.

Todd McClay: What other benefits are the Government’s tax changes delivering to the economy?

Hon BILL ENGLISH: The tax changes were one part of a wider programme to tilt the economy towards savings, exports, and productive investment, and away from the excessive borrowing, spending, and property speculation that had driven our growth through the previous 10 years. We need to tilt the economy so that in the next 10 years we build our capacity to earn a living from the rest of the world, rather than borrow it as the previous Labour Government did and thereby damage the economy.