The Treasury is calling for further cuts in personal and company tax, plus higher GST and the introduction of a capital gains tax, but the government has ruled out all of these moves.
The tax cuts are a “key priority” to revive growth and make New Zealand more competitive, Treasury Secretary Dr John Whitehead said in a speech to business leaders in Wellington this morning.
“There is a growing view that the high mobility of our skills base means high personal income taxes are especially harmful for New Zealand’s growth and productivity.
“There is also growing evidence that productivity is being held back by high corporate tax rates.
“With average OECD rates trending down, keeping our corporate tax rates competitive will be a priority. The pressure on us will be even stronger if the review of Australia’s tax system currently underway leads to further company tax cuts across the Tasman."
Dr Whitehead said that despite the large and continuing deficits in the government’s accounts over the next decade, New Zealand’s tax rates should not be allowed to get too far out of line with other economies, and preferably should be better than other countries.
A spokesman for the Minister of Finance said that Mr English shared the Treasury’s goal of lower tax rates ‘over time” but the major constraint was affordability.
Government deficits are forecast to increase from nearly $3 billion dollars in 2009 to $9.6 billion in 2012 and $8.4 billion in 2013.
Doing as Treasury proposed would involve increased borrowing, or cuts in public services or in entitlements.
“The government is not prepared to do that. A capital gains tax or an increase in GST are not on the government’s agenda, a spokesman for Mr English said.
As stated in the budget the government will implement tax cuts only when they are affordable.
The tax cuts are part of the Treasury’s recipe for growth which also includes further public sector reform, and a shift to taxing consumption and assets including a capital gains tax, and regulatory reform.
However the Treasury agenda is not necessarily the government’s agenda, with Finance Minister Bill English and Prime Minister John Key each now seeking advice from their own group of informal private advisers.
Dr Whitehead acknowledged that “meaningful tax reform is not an easy undertaking, and it’s harder in times of fiscal stringency,” but he said Treasury’s judgement was that “many of New Zealand’s current policy settings will not deliver the performance we need.”
The spokesman said Mr English remained committed to lower tax rates “over time”, and to the 30/30/30 formula for personal, corporate and trust tax rates.
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