Budget 2021: Less borrowing, more business support key to economic prosperity
Businesses are more gloomy about the economy than last year, despite performing better than expected
Mention the word ‘tax’ to most people and they’ll tell you it’s boring. Then mention individual changes to the system that affect landlords, like interest tax deductibility on residential rentals and the bright line test. Or the idea of shifting our income tax bands to stop Kiwis on “average” incomes slipping into the next bracket up.
Suddenly everyone’s talking at once.
Time to read: 4 mins
Because the truth is, tax affects every one of us, there's a saying about it. Whether the government is spending it, collecting it, or we're saving it, it has the power to make a huge difference to our lives. Tax policy matters. And while we've done surprisingly well despite COVID-19, changes to our tax policy now, such as tax deductibility, action on tax band settings and also our local authority rates, have the potential to either solve or exacerbate some of the issues highlighted in the latest Tax Freedom Day results. It's vital that New Zealanders keep talking.
Each year, Baker Tilly Staples Rodway calculates the date when Tax Freedom Day will fall in New Zealand. As in other countries around the world, this marks the hypothetical day when taxpayers have paid their full annual tax bill and get to keep every dollar for themselves for the rest of the year. We're interested in seeing exactly what impact our country's policy settings have on Kiwis' wallets, and which direction we're heading in.
This year, New Zealand's date falls on 11 May, two days earlier than it would have been in 2020 and just two days later than 2019. Think about that: in a year where international trade has been massively disrupted by COVID-19, supply chain issues, lockdowns and closures, we are still managing to pay roughly the same proportion of tax as we did in a good year.
That's partly down to annual GDP remaining roughly the same as last year's, despite some lumpy patches across certain months. However, kudos must be given to the government for its wage subsidies and other business incentives, which have helped keep many New Zealanders employed. In New Zealand, taxes from these government subsidies have been included in the Tax Freedom Day calculations. The first wage subsidy ($14 billion) was the equivalent of 4.5% of GDP, or 16.5 days' worth of economic activity. This goes to show how significant the wage subsidy really was.
On the other hand, there are some notes of caution for the future. New Zealanders' wealth in terms of assets, and particularly our houses, is increasingly out of step with our income. The median house price rose more than a fifth in the year to February 2021. This marks a growing disparity between those who have already made it onto the ladder, or to be more accurate, escalator, and those who are facing an out of order sign.
Addressing this disparity will be crucial to achieving the government's aims of improving equality across New Zealanders. Recently signaled measures such as revoking interest tax deductibility on residential rentals are unlikely to make much of a difference to when Tax Freedom Day falls. Rather, it's our tax band settings that have the most power to put more money into the pockets of average New Zealanders, and especially those on lower salaries.
In the early 2000s, Tax Freedom Day fell in late May. By 2010, the date had shifted around two weeks earlier, meaning our collective tax bill was smaller. That's because our tax bands were lowered, from a top tax rate of 39 per cent to 33 per cent, with corporate taxes falling from 33 per cent to 28 per cent. Aside from the introduction of a new 39 per cent tax rate this year, which only affects those on incomes greater than $180,000, little has changed since despite incomes creeping up. This is the infamous bracket creep, where New Zealanders' slowly increasing salaries take more and more people into the next tax tier despite wages not keeping pace with inflation.
It's encouraging to see Simon Bridges aiming to further debate on this issue. Regardless of the outcome, regular reviews of our income tax settings are essential to ensure policies don't inadvertently cause unfairness or harm to those on lower incomes over time. It must be borne in mind that the subsidies and other financial support offered to New Zealanders and businesses during COVID-19 must be paid back somehow, which is likely to take the form of additional taxes or other financial measures such as extensions to the bright line test.
This also applies to local body rates. Rates rises such as Wellington's nearly 14 per cent increase for 2021 are another factor that could push Tax Freedom Day back in future years, and affect how New Zealanders as a whole fare compared to our trading partners.
Our aim with Tax Freedom Day is not to criticise the government, or local governments, of the day, but demonstrate the impact of policy decisions on our finances and encourage New Zealanders to have their say. A healthy interest in tax is an interest in the wellbeing of our taxpayers.
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