There is nothing scarier than a government in surplus

By: Jordan Williams

The series of new spending initiatives over the past few weeks are looking more and more like pork barrel election year bribes and suggest that the healthy government books are going to be squandered.

The National Party’s election into government in 2008 was partly driven by John Key positioning the National Party as the substitute for Helen Clark and Michael Cullen’s ideological opposition to tax relief.  But despite the talk, it has never walked the walk.  Here the government is, finally, able to afford meaningful tax relief but it appears to be saying ‘we know how to spend your money better than you do’.

There are hundreds of groups that will seize the opportunity.  The squeals for more public spending on pet projects: albino snails, art subsidies, industry grants, there’s a group for every cause.  Nothing drives calls for more spending, and is as scary for taxpayers, than the government in surplus.

Unfortunately, Bill English is responding to that political weather. Pre-budget announcements suggest that his fiscal restraint has gone out the window.  More corporate welfare via R&D grants for hand-picked businesses – check.  Another $303 million for multinational film company subsidies – check. $27 million to do up marae – check.  No doubt the government will throw more money onto the housing demand bonfire (driving up prices and making the problem worse) in the coming days.  Sometimes it is easier to throw money around, rather than fix a problem – especially in an election year.

Earlier in the month, Finance Minister Steven Joyce announced a new government debt target of between 10 and 15 per cent of total domestic product by 2025. At first, that sounds reasonable, especially given that a loan drawn by the government today, is simply a higher tax burden tomorrow.

But the lower target assumes that the New Zealand government has a debt problem. It does not. At 24 per cent of GDP, New Zealand’s government net debt position is very healthy compared to other members of the OECD.

Last week, the International Monetary Fund warned that New Zealand’s economy is vulnerable to external shocks because of our indebtedness to the rest of the world. But, unlike comparable economies, our debt is mostly borrowed by private households and business, not the government. It warned that household debt (an astronomical 168 per cent of disposable income) risks destabilising the economy should a global shock lead to conditions that make it difficult for Kiwis to repay their mortgages.

That is a big reason why tax relief is so important. Because Bill English has not adjusted income tax thresholds to match wage inflation, Kiwi workers are paying a much higher proportion of their income in tax. The effects since 2011 cost about $26 per week for the average worker. Tax relief less than that is no more than catch up.

Tax relief would allow all households and business to pay down their debt. A package, appropriately targeted, would also have the effect of incentivising wealth creation, hard work, and fuelling economic aspiration and growth.

Instead of using the surplus to reduce the tax burden and allow New Zealanders to get ahead under their own steam, the government is throwing money at favoured causes and industries the media deem as sexy.

By 2020, government surpluses are expected to be $8.5 billion per year.  That is so large, even ACT’s tax cut package could be implemented with billions still left over for new spending and debt repayment.

With Bill English having pumped $10.36 billion into new spending – and only $415 million allocated for tax relief in that time – if now isn’t time for meaningful tax relief it never will be.

Jordan Williams is the Executive Director of the New Zealand Taxpayers’ Union. Its report, “5 Options for Tax Relief in 2017” can be seen here

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