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

[Sitting date: 04 April 2012. Volume:679;Page:1638. Text is incorporated into the Bound Volume.]

2. Dr RUSSEL NORMAN (Co-Leader—Green) to the Prime Minister: Does he stand by his statement that “if you go and have a look at the tax cuts, they literally were neutral” and, if so, what is the projected net cost of the first four years of the 2010 tax package?

Rt Hon JOHN KEY (Prime Minister) : In terms of the second part of the question, the cost is $415 million, but by the fourth year, and for ever after, the package is strongly positive. In terms of the first part, regarding my quote, I was talking about all the Government tax changes over 3 years, both tax cuts and tax savings. These tax changes, including the 2010 Budget changes, were slightly fiscally negative in 2008-09 and 2009-10, but fiscally positive from 2010-11 onwards. So in the short term, yes, they are fiscally neutral. In the medium to longer term they are actually fiscally positive. They reduce Government deficits and reduce Government debt compared with the situation we inherited on coming into office. If the member wants me to, I am happy to table this document that came from the Minister of Finance’s office. What it shows is the cost of the overall tax savings, tax packages, and the likes. If you go from 2008-09, there are these following astounding numbers. There is a cost of $427 million in 2008-09, the following year has a cost of $322 million, and then it is positive $270 million, positive $1.4 billion, and positive $1.83 billion. By 2013-14 it is positive $2 billion—a remarkable achievement.

Dr Russel Norman: Does he dispute the table on page 8 of the Minister of Finance’s executive summary for Budget 2010, showing that the projected 4-year cost of his Government’s 2010 tax cut package was a static $1.1 billion cost to the Crown?

Rt Hon JOHN KEY: Yes, because that measures something different. If you look at the overall tax costs and tax savings, as I said earlier, they are fiscally positive, or, to put it into plain English, if we unwind them all we will have bigger deficits and bigger debt.

Dr Russel Norman: Does the Prime Minister dispute the table on page 8 of the year end Crown Financial Statements for 2010-11, which shows that his Government’s 2010 tax cut package has in practice cost about $1 billion in just the first 9 months?

Rt Hon JOHN KEY: Yes. I go back this document, which looks at all of the tax changes and tax savings. I am more than happy to table it if the member wants it, but let me go through it one more time. For 2010-11, for instance, there is a net gain of $270 million; by 2013-14 it is positive $2 billion. So if people want to vote for the Green Party and have these changes reversed, it will have to fund $2 billion per year of extra debt on top of the about $10 billion it wants to spend on other things.

Michael Woodhouse: How much larger would the Budget deficit be this year and for the next 2 years if the Government had continued with the tax settings it inherited on coming to office in 2008?

Rt Hon JOHN KEY: What an outstanding question. If the Government had not made all the tax changes that it did—both tax cuts and tax savings—the Budget deficit would in fact be $1.5 billion worse this year. The next year’s deficit would be $1.8 billion worse, and in the year after, the deficit would be a whopping $2.1 billion worse. So our changes are reducing the deficit and reducing the amount the Government needs to borrow. No wonder the IMF has praised this Government’s economic leadership in the paper this week.

Dr Russel Norman: Can the Prime Minister point to exactly what is wrong with the table produced by Treasury—not the letter produced by the Minister of Finance but the table produced by Treasury—in the Crown Financial Statements for 2010-11, which shows that the net cost to the Crown of the 2010 tax cuts in the first 9 months was just over $1 billion?

Rt Hon JOHN KEY: The problem with the table is it shows one part of the Government’s overall tax changes. So it is all very well counting one bit, but if you do not count the other bit, you do not get the total package. That was why when the Minister of Finance got up in the Budget debate and announced it, he called it a package. There were lots of things in it, not just one thing.

Dr Russel Norman: Is the Prime Minister actually familiar with table 4 on page 8 of the Financial Statements of the Government of New Zealand prepared by Treasury, which does not have just one part of the tax package but includes all the different elements of the tax package? The conclusion of all the different elements is that the net effect of the 2010 changes was to cost the Government of New Zealand in just 9 months about $1 billion in lost revenue.

Rt Hon JOHN KEY: It really does not matter how many times the member says it; it does not make it right. The numbers that are right are the ones produced by the Minister of Finance’s office, and would have been supplied by Treasury, and what they show is that the package is net positive for New Zealand.

Dr Russel Norman: Has he read the Crown Financial Statements for February 2012, just released this morning, which show a further $360 million shortfall in GST revenue, a $200 million shortfall in income tax, and a $193 million shortfall in corporate tax, indicating that the costs of the Government’s 2010 tax cut package have blown out even further than indicated by the Crown accounts?

Rt Hon JOHN KEY: Yes, I have seen them. The illogical part of that member’s question is, in fact, that this Government raised GST. If we had not done that in the recent Budget, the number would have been even greater. There are a number of changes that are happening in the economy—and those numbers are against forecast—not the least of them being that there is a positive savings rate in New Zealand, so New Zealanders are consuming a bit less. Quite a lot of the taxes that were paid were around corporate taxes; that has been the big difference. And as a result of the global financial crisis both in investment and in property income there were substantial taxes paid in 2006 and 2007, when basically people were consuming debt. Now those losses are carried forward and it has had quite a big impact on the accounts. That is the big difference, as well as the unfunded tax cuts by the previous Government.

Dr Russel Norman: Is it not true that according to Treasury and the Treasury numbers the tax cut package was projected to cost $1.1 billion over 4 years, when it actually cost, according to the Government accounts, about $1 billion in the first 9 months, and today as a result of the new figures it is likely to cost even more than that when we look at the drop in GST and the other drop in tax takes?

Rt Hon JOHN KEY: In a word, no.