Editorial: Budget puts NZ on course for stability

Finance Minister Bill English. Photo / Mark Mitchell

Opinion

If National's second Budget has done nothing else it has restored reasonable personal tax rates.

The top rate, raised for no reason but vengeance 10 years ago, is coming back to the 33 per cent it was previously.

With the revenue it will gain by increasing GST, National has also reduced lower personal rates, by more than expected for the second-lowest income band.

And it will compensate superannuitants and beneficiaries for the GST's 2 per cent rise in consumer prices.

Thus everybody will have a little more in their pockets from October, which the Government has done its utmost to encourage them to invest rather than spend.

Whether its utmost is enough to have a desired effect on personal investment patterns remains to be seen.

The residential property market has suffered a loss of depreciation claims and Loss Attributing Qualifying Companies will have both profits and losses assessed at the investors' marginal rate.

The house market, practically frozen while it awaited the Budget, will soon show whether anything has changed.

The main surprise yesterday was in company taxation.

The company rate is to be lowered to 28 per cent, but not because the Government thinks firms need the relief - it expects to recover the revenue by other means, which include removing company property depreciation claims too.

It seems to be lowering the headline rate because international company rates are coming down and it wants us to be ahead of the play.

But lowering the company rate comes at a cost to fairness and efficiency in the system, which is only partly offset by reducing tax rates for unit trusts, superannuation funds and portfolio investment entities also to 28 per cent.

Income earners on the 33 per cent top rate will continue to have an incentive to avoid it.

The Budget was upbeat on the economic recovery, forecasting growth of 3 per cent a year for four years, which would reduce unemployment to 4.5 per cent in four years and return the Government's accounts to surplus in five years.

Most important, those forecasts enable the Treasury to plan debt reductions. With Greece and other eurozone countries demonstrating sovereign risk at present, the merits of reducing debt to New Zealand's pre-recession level have never been more evident.

The Finance Minister's fiscal report noted that when household and business debt is added to the state's, this country has one of the highest net foreign liability positions in the world, $168 billion, equivalent to 90 per cent of the country's annual output.

He hoped households would emulate the Government's efforts to contain spending and reduce debt.

A surge in consumer prices induced by several Government policies will be one discouragement to spend.

Inflation is expected to spike at 5.9 per cent next March when the GST rise is added to increases in accident compensation levies, tobacco excise and the emissions trading scheme.

National Governments are never happier than when they can reduce taxes, and never more determined than when they can remove a welfare rort.

They managed to do both in this Budget, stopping those who minimise their assessable income from claiming income support from the state.

Losses stated for tax purposes will be added back when welfare entitlements are assessed.

That device looks more robust that the steps taken against tax avoidance yesterday.

The Government has not forgotten that only half the country's top earners have been paying the top rate, and that those who do pay it provide nearly half of the revenue extracted from personal incomes.

It has given the payers a more reasonable rate. If the rest in the highest bracket have been induced to contribute fully, the Budget will have been a success.