Brian Fallow: Tax plans won't summon a Hallelujah Chorus

The economy is heading for a soft landing over the next couple of years, so the forecasters tell us, with the Government's tax and spending plans intended to slow its descent.

Over the past year money poured into the Government's coffers faster than it poured out. It expects to be able to knock about $2.4 billion off its debt.

This has had a braking effect on an economy seen as in danger of overheating. The reverse is expected over the next three years, with fiscal policy providing what ANZ National Bank economists call "solid counter-cyclical support" to the economy.

Looked at from closer to the ground, however, the tax plans announced yesterday are unlikely to summon up a Hallelujah Chorus.

The move to inflation-adjust the thresholds in the income tax scale is not retrospective and will take three years to reach pay packets.

It will cost the Inland Revenue $360 million in its first full year, 2008/09 - almost exactly what the new tax on the carbon content of fossil fuels will bring in.

Except that the carbon tax arrives a year earlier. First you rob Peter, then you pay Paul.

Someone on the average wage will be about $6 a week better off from the income tax changes, but the average household will be about $4 worse off from the impact of the carbon tax on petrol, gas and electricity prices.

We are losing Kiwis to Australia at the rate of 600 a week, says Opposition leader Don Brash, and there is nothing in this Budget to encourage them to stay.

But a swift comparison of the income tax changes announced by Treasurer Peter Costello last week and Michael Cullen yesterday shows Australians face higher tax rates. They pay 30c in the dollar on income above A$21,600 ($23,000) and (from July 1) 42c in the dollar above A$63,000.

Our 33c rate kicks in at $38,000; below that the rate is 21c. From 2008 the threshold will rise to $40,324.

Mr Costello declared that more than 80 per cent of Australian taxpayers will face a top marginal tax rate of 30 per cent or less over the next four years.

But if the threshold changes Dr Cullen announced yesterday applied right away, three-quarters of New Zealand taxpayers would face a top rate of 21 per cent.

The problem is that with Australian pre-tax incomes so much higher, they still end up taking home on average about NZ$175 a week more than their Kiwi counterparts.

Dr Brash is right to argue that it will take less timid measures than those announced yesterday to narrow that gap and the skills drain it engenders.