Tax Policy Ahead
The Budget papers state part of the Government’s fiscal strategy is to ensure a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy.
With that in mind the Government’s objectives for the tax system are:
- a system that is efficient, fair, simple, coherent and collects the tax that is due, on time and in full
- a progressive tax and transfer system for individuals and families
a system that promotes the long-term sustainability and productivity of the economy
- a system that supports a sustainable revenue base to fund government operating expenditure around its historical level of 30% of GDP, and
a system that treats all income and assets in a fair, balanced and efficient manner.
Additionally the Government supports a sustainable broad-base low-rate framework for the tax system. This is to ensure that taxes are fair and efficient, and that they do not impede economic growth. It also helps keep compliance costs low and minimises opportunities for avoidance and evasion.
It is added that, following the Government’s response to the Tax Working Group, the tax policy work programme will consider a range of options to further improve the tax system.
The Budget papers observe that people and businesses should pay their fair share of tax. This includes multi-national companies and those in the digital services field. New Zealand is currently working with the OECD to find an internationally agreed solution for taxing the digital economy. However, the Government may need to move ahead with its own work so that we can proceed with our own form of a digital services tax, as an interim measure, until the OECD reaches agreement. The Government will release a discussion document exploring options for taxing the digital economy.
The Budget papers add that the Government also aims to continue to improve public confidence in the tax system and Inland Revenue. The objective is for a system that helps people meet their obligations, is fair and inspires confidence. With this in mind, the Government states it will ensure that tax policy development continues to be inclusive, consultative and transparent.
The Budget papers further comment that the Government will continue to invest in the modernisation and simplification of New Zealand’s tax system through Inland Revenue’s Business Transformation programme. Recent changes will end unnecessary secondary tax and enable Inland Revenue to provide automatic income tax refunds for salary and wage earners. The next stages of Business Transformation will modernise the administration of student loans, KiwiSaver and child support. The budgeted cost of Business Transformation is $1.12b.
The core Crown tax revenue generated by the taxation system is said in the Budget papers to average 28.5% of GDP. That is obviously most of core Crown revenue, which comprises 30.7% of GDP. The core Crown revenue forecast for the 2019 financial year is $91.6b (increasing to $96.4b for 2020).
The core Crown revenue is consumed by core Crown expenses forecast to be $87.3b for 2019 ($93.3b for 2020). Some indication of the application of core Crown expenses was given in the comment that social security and welfare expenses in the 2018 financial year accounted for 29% of total Crown expenses, with the figure being 16% if New Zealand superannuation is excluded. Welfare expenses excluding New Zealand superannuation are expected to remain broadly stable as a percentage of GDP over the present four-year forecast period.
It is added that the Government’s approach to managing expenses will also see existing expenditure reprioritised where it is not aligned with wellbeing objectives. In Budget 2019, more than $1b has been reprioritised.
The Budget papers confirm the Government’s intention to make regular contributions to the New Zealand Super Fund. Some $9.6b is forecast to be contributed in total over the next five years. The size of the Fund is projected to be $64b by the end of the 2023 financial year.
This system ensures that the taxpayer contributes to three superannuation streams: one for current superannuitants, a second for the taxpayer’s own superannuation and a third to the Fund for draw-down when paying future superannuitants.
On the economic front it is predicted that New Zealand’s real GDP growth is expected to strengthen from 2.4% in the year ending June 2019 to 3.0% in the year ending June 2020. Growth is then expected to moderate in subsequent years.
It is acknowledged that the stimulus coming from additional government investment in Budget 2019 will lift growth in the near term, supporting household incomes, with increased demand flowing through into business investment. Growth will also be supported by historically low interest rates, continued net immigration inflows and historically high export prices. The unemployment rate is expected to remain low, settling around the Government’s target of 4% across the four-year forecast period.
It is also recognised that the increase in spending announced in Budget 2019 might be expected to place slight upward pressure on interest rates. However, a moderate increase in spending is appropriate, given the need for greater investment and in the context of subdued inflation and historically low interest rates.
The Budget papers break down the sources of taxation revenues as forecast for 2019 as follows:
- individuals: $37.4b
- corporate sector: $14.8b
- other direct income tax: $2.3b
- GST: $21.9b, and
- other indirect tax: $7.3b.
The figures relating to Inland Revenue indicate that Government spending within the Department includes the following:
- $142m on investigations
- $616m on customer services
- $230m on publicising taxation obligations and entitlements
- $129m on managing taxpayer debt and outstanding returns
- $113m on processing obligations and entitlements
- $52m on the Best Start tax credit
- $302m on child support payments
- $2.27b on the family tax credit
- $873m on the KiwiSaver tax credit
- $375m on paid parental leave payments, and
- $40m on the research and development tax credit.
There is also a $850m charge for bad debt written off by Inland Revenue for debt other than child support and student loan debt. The latter is written down to fair value by $592m.
In relation to Government debt, the Budget papers state that there were $70b of New Zealand Government Bonds (NZGB) on issue as of 30 April 2019. The Government remains committed to maintaining a sustainable NZGB market. The Government intends to maintain levels of NZGBs on issue at not less than 20% of GDP over time, even if net core Crown debt falls below 20% of GDP. This ensures ongoing government access to debt funding if needed, reduces volatility in the size of borrowing programmes through time, and provides wider capital market benefits.