Wednesday, 2 December 2009

No tax changes without spending changes

Unless National shows some backbone in cutting back the rather large run-up in government expenditures that occurred under the last term of the previous Labour government, any moves to make the tax system more efficient are a rather bad idea.

In 2004, core crown expenses totaled about $42 billion. In 2007, $54 billion. 2008: 57 billion. We're on track for about $63 billion this year. That brings central government spending from about 30% of GDP to about 35% this year. Some of this year's figure would reflect the effects of the recession, but we're likely on track for a steady state of 34% absent changes.

Labour's spending increase from 2004 to 2008 was about $2000 per capita in inflation-adjusted terms. Median per capita income from salary and wages for those earning salary and wages is about $40,000 per year: Labour's spending run up was not insignificant.

National reckons any changes in spending to be too radical to contemplate. David Farrar thinks it politically impossible to reverse the three-year runup in Labour's spending in anything less than three terms of a National government.

So even if trading a reduction in the top marginal tax rate for the imposition of a land tax is efficient, it's a bad idea. Here's the likely outcome. The Tax Working Group recommends eliminating the punitive top rate imposed on "rich pricks" (our former Finance Minister's delightful term for the folks who pay the bills) and covering the tax reduction by increases in GST and imposition of a land tax. The new tax system is more efficient, but National doesn't reduce spending. Labour takes office in 2014, reinstitutes a high top marginal rate on "rich pricks" and boosts government spending to 40% of GDP, which it's only able to do because National made the tax system more efficient to start with. National takes office in 2020, considers any reductions in government spending to be "too radical", gets rid of the punitive top marginal rate and increases GST and the land tax to compensate for the loss. Lather, rinse, repeat.

The spending cuts have to come before the tax changes to make it credible. And Finance Minister Bill English's pre-emptive response to the 2025 Productivity Commission's report does the opposite.

No land taxes without spending cuts.

Update: Fran O'Sullivan rightly excoriates Key as well. (HT: Kiwiblog).

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