Tax cuts will magnify income gap: union

Photo / Kenny Rodger

Tax cuts which come into effect on Friday are unfair and will fail to drag New Zealand out of recession, a union economist says.

A package of income tax cuts takes effect on Friday and at the same time GST will go from 12.5 to 15 percent.

The tax cuts will benefit earners in proportion to their salaries, with high earners reaping the biggest gains. However, Finance Minister Bill English says there will be gains for everyone, with only a few individual circumstances where that isn't the case.

He said on TVNZ's Q&A programme yesterday the change was innovative policy aimed at switching people's incentives and focusing on reducing debt rather than spending, and there was evidence of that already happening.

While a reduction in spending was not ideal for the likes of retailers, it was a case of "short-term pain and long-term gain", English said.

"Our households are mainly the owners of that debt, and they've really taken to heart the message that they need to get their debt down before they spend, and that is a bit tougher on retailers in the short-term. But as they get the debt down, then households will start spending again."

Council of Trade Unions economist and policy director Bill Rosenberg argued the tax changes would not drag New Zealand out of recession and towards long-term improvements in the economy, but would simply magnify existing income inequalities.

"The gap in take-home pay between someone on $30,000 a year and someone on $150,000 a year will grow by $102 a week as a result of the income tax cuts -- a tax cut of $16.15 per week compared to one of $117.88," Rosenberg said.

Once increased GST was taken into account, lower income earners would barely notice any gains from tax cuts, and that was the group which stimulus should have been aimed at.

"The tax cuts will make it harder to pay off government debt. Rather than a temporary, targeted stimulus to help New Zealand out of the recession, they put money in the hands of people less likely to spend it in New Zealand and the cuts become part of the government's structural deficit." Mr Rosenberg said that led to pressure to make cuts in government spending.

Mr English said it appeared the re-balancing sought by the Government was happening.

"We're probably getting it a bit faster than we expected, but there's no doubt that unemployment has peaked, the economy has grown over the last three or four quarters and will continue to grow."

- NZPA