Thomas Pippos: English plays it safe on the tax front

Opinion

What do you do when you stare into a fiscal abyss that was not of your making, while also having to deal with the insatiable appetite for Government revenue?

In Finance Minister Bill English's case it was stay calm and do nothing precipitous, including signalling any increase in taxes.

It was an unenviable predicament and small comfort that his international peers may be facing something that has morphed into a black hole.

While he will be pre-programmed to simply say "no", the defining moments will likely be when and to what extent he will say "yes", with the current Budget giving few clues in this regard.

Budget 2009 subliminally highlighted that there is no silver tax bullet, quick tax fix, or easy tax solution.

In fact, somewhat surprisingly, other than highlighting the indefinite deferral of the personal tax cuts, any comment on tax was largely limited to statements regarding fiscal risks.

In those statements there was no signalling at all that structural change to the existing tax rules was imminent, quite the opposite.

The mention of the tax working group referred to facilitating the consideration of the direction of the tax system in the medium term, a term the minister did not want to define.

Consistent with this, there was no signalling that New Zealand's tax predicament is unique in the sense that it is more exposed than most to globalisation and the issues associated with the mobility of capital and labour.

Ultimately, however, structural change of the tax system will be considered as part of the tax working group process and, depending on what that structural change actually comprises, there could be material changes to today's forecasts.

Potentially, this could make Budget 2010 the Budget to watch but again the Government is giving no clues.

And in terms of the destination of any such tax reform, it can't just be about taxing what is here. It should be about attracting, retaining, and then taxing economic activity in New Zealand, as it is that activity that creates and retains highly paid jobs that fuel the tax take.

Whether the correct policy settings will ultimately be implemented will be materially influenced by whether officials can connect the dots to present an implementable tax strategy consistent with these goals.

Time will tell, but it has taken us 20 years to introduce an active income exemption for international investments. And structural tax change, by definition, will affect the masses, which introduces the political dimension.

But positively, there was no sentiment to raise taxes which may have been the view of the previous Government in the current circumstances.

* Thomas Pippos is managing tax partner for Deloitte.