Budget 2010: Govt should be congratulated for achieving tax reform

Yes we can!

You could be easily mistaken for thinking this was an election year as we see the return of Budget surprises - almost exclusively positive.

And this time we get to see New Zealand accelerating towards and, in places, passing Australia. That's different! It's even more surprising given that this is all in the context of several more years of Budget deficits, albeit now anticipated to reverse three years earlier in 2016.

In terms of signals, reductions in personal taxation should encourage greater workforce participation, which is a key foundation to stimulating productivity and economic growth. The main disappointment here is continuation of the disincentive created by the Working for Families regime, which has been left untouched, other than some targeted measures to counter obvious avoidance of the principles of that policy.

Savings get an unexpected shot in the arm with an effective drop in the taxation rate to savings vehicles to 28 per cent. It's not a blanket 15 per cent as in Australia, but it's not a bad first step.

The vexed question of compulsory superannuation is left unaddressed.

Even more surprising is a corporate tax reduction to 28 per cent which will encourage greater investment by the corporate sector - and leapfrogging the timing of the Australian equivalent reform.

There are also the revenue raising measures - we do live in the real world.

The increase in GST is the most simple and efficient way to balance the books. Yes, a GST increase is regressive but this has been offset by other measures for low- and fixed-income earners. Clearly those impacted the most would want more relief and could feel hard done by. Ultimately, however, stimulating economic growth and prosperity is the real prize, and we all benefit from that. The events in Spain, Portugal and Greece show that Governments borrowing more and more to fund deficits is not sustainable.

Realignment of the taxation settings for residential property investment was also long overdue. It should have the desired effect of moving that sector's tax outcomes closer to those of other investments, and could release capital to other more productive areas - again, a positive outcome. Extending the depreciation changes to commercial buildings was always a risk and can be explained as collateral damage on the property front.

Somewhat more alarming from a principled perspective is the change to the thin capitalisation threshold. That seems precipitous and goes against some of the positive corporate signals elsewhere. This issue is worthy of further consideration and misses the real target. Even on a good day, a ball can be dropped.

Challenges still exist in attracting and retaining mobile capital and labour. This is particularly so given Australia's path which provides clear incentives to save and to attract and retain capital and labour.

Also not addressed were issues of Transtasman harmonisation and the gravitational investment pull by Australia's capital market, given that mutual recognition is unlikely to see the light of day this century. This nut needs to be cracked in a manner that enables continued New Zealand portfolio equity participation and does not incentivise head offices to relocate to Australia.

The Government should be congratulated for achieving tax reform. The next step - building on this package to grow the economy - is a new challenge. Let's hope Budget 2011 is up to it.

Thomas Pippos is the managing tax partner for Deloitte.