Editorial: It may hurt but decisive Budget vital

Bill English will not have much money to give away on Thursday. Photo / Marty Melville

Seldom has a Budget been as crucial to the economy as the one that Finance Minister Bill English will deliver this week. It is immediately crucial to the housing market, where activity has been practically frozen while prospective buyers and sellers wait to see what tax will do to property investment.

And it is crucial to the country's productivity that something is done to divert investment from housing and consumption to industry and exports.

The minister has made no secret of this objective. For many months he has been travelling and speaking with charts to illustrate his concern that New Zealand was in an export recession long before the domestic sector's housing bubble burst in 2007 and it was struck by the recession of 2008.

While household and Government spending had been happily rising year by year, export activity had slumped in 2005 and has not recovered.

National came to office at the end of 2008 with the world in a financial crisis and New Zealand counting itself lucky to have lost nothing more than Budget surpluses and facing a decade of deficit spending. The 2009 Budget came a month or two before the Government could be confident of the economy's recovery.

It did not cut spending drastically but assured international credit rating agencies it would deal with the projected deficits more decisively this year.

That assurance needs to be met on Thursday. The Government will need to find more revenue and reduce its spending.

At the same time it should do what it can to realign the economy from domestic consumption to tradeable production.

To this end, a Tax Working Group has recommended increasing GST to reduce personal and company tax. It has also suggested ways to make residential property investment contribute to tax revenue rather than being a cost to taxpayers through rental loss write-offs.

Mr English has cited the revenue loss often enough to encourage hope - or fear in the real estate sector - that he is about to do something about it. The Budget ought to at least limit the rental expenses that can be deducted from other income. It could go further and strengthen the definition of taxable capital gains.

The Budget will certainly raise GST to 15 per cent and use all that revenue to reduce income tax. It will favour the top rate, reducing it from 38 per cent to 33 per cent, aligning it with the rate for trusts and other methods now used to avoid the top rate.

Ideally, the top rate would be aligned with company tax at 30 per cent to remove further opportunities for avoidance. But the Government has wanted to leave itself room to match a company rate reduction in Australia if necessary.

Treasurer Wayne Swan's Budget last week relieved that pressure somewhat. His intended drop to 28 per cent four years from now depends on a surcharge on mining companies that is highly contentious and may force the Rudd Government to an election it could lose.

In any case, matching Australia's corporate rate should not be the over-riding consideration. Relative incomes and internal efficiency are at least as important. The real challenge from across the Tasman was the Budget's forecast of 3.25 per cent growth in the coming year and 4 per cent the year after. It also forecast a return to surplus in 2015-16, three years earlier than expected.

Mr English will not have much money to give away on Thursday, which is why the Government has been revealing its gifts in advance - $225 million extra for corporate and public research and development, $30 million for tourism. There can not be much more.

The country needs a decisive Budget. It might not be popular but effective economic measures rarely are. This week we will find out whether the Key Government is up to the task.