Bernard Hickey: Deeper into mire as tax reforms fail

Figures out this week from Barfoot and Thompson for property sales in Auckland showed higher salary earners are snapping up the more expensive properties. Photo / Janna Dixon

Back in May last year when the Government announced the biggest tax reforms since the mid-1980s there was plenty of hope.

The theory looked good. Cutting the top income tax rate from 39 per cent to 33 per cent seemed to kill three birds with one stone.

It encouraged those on middle incomes to strive for higher incomes in the knowledge they would keep more of it. It removed the gap between the top income tax rate and the family trust rate, closing down a big loophole.

And those on higher incomes could afford to save their extra disposable income, which would boost New Zealand's savings rate and give capital markets a kick-start.

The increase in the GST rate was designed to help pay for the cut and discourage consumption, therefore encouraging saving.

The changes to the rules on claiming depreciation of buildings for tax purposes and the removal of Loss Attributing Qualifying Companies (LAQCs) as a vehicle for rental property investors were supposed to take some heat out of the property market, and force investors to look at other options.

The company tax cut was supposed to encourage companies to invest here and employ more people. All these would bring down the budget deficit and transform the economy from a consuming and borrowing junkie into an investing and exporting powerhouse.

Simply put, it's not working.

The shock of the GST increase, on top of rising food and petrol prices, has forced consumers deeper into their spending shells. GST has hurt a swathe of society that could least afford it. Companies are shedding staff.

The tax cuts for those on higher salaries has not been saved and invested in job-creating export industries. Instead, it is being geared up with yet more foreign-supplied mortgage debt.

Figures out this week from Barfoot and Thompson for property sales in Auckland showed higher salary earners are snapping up the more expensive properties. Sales of property worth more than $800,000 rose almost 40 per cent in March from a year ago, while lower priced property sales barely rose.

The Government's deficit is blowing out to unprecedented levels, in part because of the drop in income tax receipts and weak GST returns. Company profits are also weak. ANZ forecast this week the Government is likely to borrow as much as $20 billion this year or about $4500 per person.

Our current account deficit is also set to worsen as foreign-owned companies repatriate yet more generated profit, thanks to the tax cut.

The New Zealand dollar, meanwhile, has surged back above pre-quake levels, making it more difficult for the economy to transform into an exporting powerhouse.

The Government would say it's too early to judge the tax package and also point to the effect of the Christchurch quake on the economy.

But the early signs aren't good. It's worth asking again: what was it all for?