Keep paying those taxes

By BRIAN FALLOW

If the Government was a company, you would have to say it has just had a very profitable year.

But for its chief financial officer, Michael Cullen, that is no reason for it to cut its prices by lowering taxes.

The operating surplus of $7.4 billion for the year ended June was the equivalent of 19 days' worth of all the goods and services produced in the economy over that year.

But Cullen is unmoved by calls for tax cuts or adjustments to the income thresholds at which higher tax rates kick in.

The strength of the economy over that year saw PAYE revenue grow $1.4 billion, or 8.9 per cent, GST increase $700 million, or 8 per cent, and company tax receipts rise by nearly $900 million, or 17 per cent.

"We had a very strong year economically but we ended up with less than 1 per cent of GDP [$520 million] to dedicate to paying down debt. And we are still forecasting a small amount of borrowing this year."

Much of the surplus is cyclical and will evaporate as the economy slows.

And there are other claims on the durable, structural element of the surplus - the beer underneath the cyclical froth.

Chief among them is the $1.9 billion put into the New Zealand Superannuation Fund to partly defray the future cost of baby-boomers' pensions.

"There is also concern about long-term health costs, and that is another argument in this period of favourable demographic transition to make sure we get the Government's accounts in as strong a position in preparation for these longer-term pressures," Cullen said.

"Our children will thank us for it. They will be in a far better position than their contemporaries in many developed countries in terms of the fiscal pressures they will face."

Cullen's yardstick of fiscal virtue is to see the level of gross Crown debt continue to decline, not necessarily in dollar terms but as measured against the size of the economy.

At the moment it is $35 billion, or 25 per cent of GDP, down from 35 per cent of GDP in 1999.

The Government's long-term goal is to reduce it gradually to below 20 per cent by 2015.

That is a less aggressive debt-reduction target than in the past.

"We have reached now, by any reasonable international standards, a prudent level of debt."

But it is important to keep a "downward bias" in the debt targets, Cullen says, because the risks and uncertainties are such that if you are not aiming to reduce the debt ratio the outcome is likely to be that it goes up.

"I think the credit rating agencies would be concerned if they saw those numbers turning in the opposite direction."

But if he cannot see his way clear to cut tax rates or raise the threshold, the healthy fiscal position does give room for manoeuvre in forms of tax relief.

Cullen foreshadowed yesterday a willingness to drop the capital gains tax which superannuation funds and unit trusts face.

Other changes to fringe benefits tax and the depreciation rules will also cost money, he says.

"I'm not going to put a a figure on it at this point, but significant sums of money."