Saturday, September 25, 2004

Is Tax Sustainable

SageNZ quotes Murray McCully reporting that total government tax revenue has increased from 30.2 billion in 1999 to 42.5 billion in 2003 and asks whether the 40% increase is sustainable. The short answer is (mostly) yes. In 1999 GDP was 101 billion and in 2003 it had grown to 126 billion (a 25% increase). The growth in GDP includes inflation and population increase (which government revenue needs to match for sustainability) and real growth (which needn't but can afford to match). Revenue would have increased to 37.7 billion just to match gdp growth leaving a net increase of only 4.8 billion (about 12% over the four year period). In fact this increase is all reflected in the surplus - government expenditure has remained constant at just under 28% of gdp.

The government has therefore held expenditure as a proportion of GDP but increased taxes or allowed taxes to rise by about 4% of gdp or 5 billion dollars. This includes about 3 billion to cover future superannuation liability and about 2 billion which (along with future revenue growth) could be returned to the public. SageNZ and Murray McCully would no doubt like to see this returned as a reduction in the top tax rate (Murray even suggests an 18% flat tax) but imho most New Zealanders would prefer it to be returned through the sort of measures in the Working for Families package, improved health and education services and universal student allowances. 1999, after all represented the endpoint of a massive redistribution of purchasing power from beneficiaries and low to middle income earners to the wealthiest. And we (or at any rate most of us) didn't vote for that.

It's also hard to argue that a 39% top tax rate is damaging economic growth. The last four years have been some of the highest growth years in our history (and we've actually caught up some of the ground on Australia). Besides Australia has a 47% top tax rate, New Zealand had a 33% top rate only for the period 1988-1999. Before that the level was 48% and for most our post-war history it has been over 60%. The decision on whether we want lower taxes or a "decent society" should be based on the preferences of the NZ public. History suggests we will advance the cause of growth far better by scrutinising the quality of public expenditure than blindly adoption a low-tax, low-spending strategy.

7 Comments:

Blogger sagenz said...

Come on! GDP growth 1999 to 2003 average was 2.4%. GDP growth over the 10 years of 1990 to 2000 was 3.1% from memory. The growth has slowed under Helengrad. You are just flat wrong that we have caught up on Australia.

The current taxbehaviour is just like stripping too much cash out of a profitable company. You dont notice at first but eventually the company runs out of steam and needs shock therapy. Sweden, Germany, France GDP per cap has steadily sunk in relation to their lower tax peers.

26 September 2004 at 4:08 AM  
Blogger sagenz said...

my wrong. I just checked stats NZ not 2.4% growth. That was a figure to 2003 prior to upwards revisions. Taking GDP from March 2000(4 months after election) to March 2004 the growth under Labour was 3.7%. Taking compounded growth that drops to 3.4%. National averaged 4.5% straight line ad 3.7% compounded from 1991 through to March 2000. So performance has dropped. National however had the post boom bust in 91-92 and the asian crisis in 98-99 dragging down its figures. By contrast Labour has had booming commodity prices. So Labour is relatively worse than National. Labour have been lucky

26 September 2004 at 4:45 AM  
Blogger Greyshade said...

The NZStats report "Monitoring Progress to a Sustainable New Zealand" has a graph of real gdp per capita from 1955 - 2001. It states that "real gdp per capita was $23,600 for the year ended 1991 and $27400 for the year ended 2001". I can't read the exact figures for 1990 and 2000 but they would have a somewhat smaller increase. The $3800 increase over 10 years corresponds to an annual straight-line rate of 1.6% or 1.5% compounded.

26 September 2004 at 3:13 PM  
Blogger Jordan said...

A reasonable way to think about the tax issue is to look at total tax revenue as a % of GDP.

If you look at the Crown Financial Statements year to June 04 (available on the Treasury's website, see page 17) the % of GDP in tax revenue (followed by dollar figure and then by *nominal* growth in GDP [not excluding inflation - that's why the numbers are big]) was as follows (these are years to June 30):

1997 - 30.7% - $30.1b
1998 - 31.0% - $31.1b - 2.3%
1999 - 29.1% - $30.2b - 3.1%
2000 - 29.1% - $32.0b - 6.0%
2001 - 29.6% - $34.7b - 6.8%
2002 - 28.9% - $36.2b - 6.6%
2003 - 30.5% - $39.8b - 4.2%
2004 - 30.4% - $42.5b - 7.5%

(By way of comparison we know that real growth in the year to June 30 was 4.1%, and in the year to June 30 2003 was 4.4% - from StatsNZ.)

What these figures show is that the tax burden has fallen, as a proportion of the economy, since 1997-1998. The tax take has increased because the economy has been growing quickly, and unemployment has been falling so more people are working more hours.

These are unambiguously GOOD THINGS and to try and spin it as a tax grab is quite desperate and pathetic.

Jordan

1 October 2004 at 9:59 AM  
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