Thursday, 12 May 2011

A payroll tax increase? Now?

The Prime Minister signals cuts to come in government spending on KiwiSaver, the tax-preferred retirement savings vehicle. The government currently subsidises KiwiSaver contribution with a one-off $1000 deposit into new KiwiSaver accounts and matches employee KiwiSaver contributions up to about $1040 per year. Employers are required to kick in contributions equivalent to 2% of your pay if you're eligible to join.

This has proven somewhat expensive for the government; consequently, John Key's signalled a halving of the government's contribution, with minimum employer and employee contributions to rise.

I hope that Key doesn't go for any large or quick increases in mandatory employer contributions. Tax incidence says it doesn't matter whether the employer or the employee bears the statutory cost, but if nominal wages are downwards sticky - and I can't believe that wage cuts consequent to mandated employer side contribution increases wouldn't get the employer into hot water - employers will react similarly to other payroll taxes. If it's done through a slow ratchet, employers can more easily compensate by varying the proportion of the total compensation bundle going to employees via cash and retirement funds.

And now I'm mildly curious whether StatsNZ data on hourly wages include effective payments made to employees by employers through KiwiSaver. I doubt that it does. Nominal wage data will then understate the growth in full employee compensation. [Update: One series includes it, another doesn't. I'll have to watch next time to see which is the one quoted in media reports. See here and here. Thanks Scott!]

Next week's budget will be interesting.


  1. Limited options budget. Once you remove those items with precommitments (whether political promise e.g., 65 year age for super, or prior budget commitments e.g., vote health and education increases), the government has little room from which to make repriortisation decisions. Essentially the large base of government expenditure is not touchable (due to rent seeking/PCT reasons). In the absence of alternative revenue sources, options like reducing government funding for kiwisaver are all that are left.

    Before someone says they could borrow more, i'd like a coherent explanation, and as a bank manager, ratings agency, international lending agency would say - show me the resulting outyear cashflows from which to meet repayments. Playing lotto with the international markets also is not answer.

    I maybe surprised by what does hapen, but hard to see what room to move there is.

    Wayne H

  2. @Wayne: I'm more hoping that they'll signal the cuts they'll be making in their second mandate and on which they'll be running. Forecasts past the coming year will require it.

  3. In that case I suggest looking at the Fiscal risks chapter of the Budget to get a real sense of the room to move.

    Wayne H

  4. The single biggest risk is the unrealistic portrayal of NZ's borrowing and debt calculated at an exchange rate more than twice NZ's long-run average.

    when the exchange rate returns to the mean, the defecit goes from $20 to $40 billion, and the nett debt up from $150 to $300 billion (or 120% to 240%).

    oops. PIGSNZ here we come.