Thursday 25 May 2017

Tax cuts require fiscal discipline

It's budget day here in New Zealand. Much has been pre-announced; Chris Keall has the summary list over at NBR. But as Rob Hosking points out, there's a pretty big remaining surplus that could yet give us some surprises. 

I'd expect most of those surprises to be saved for later election promises, but it would be nicer if they were laid out in the budget.

When it comes to tax cuts, though, we need to be careful. The surpluses look fine for the next few years, but current tax cuts would need to be reversed in a decade's time if we've neither sorted out the costs of an aging population (NZ Super, health), nor increased productivity and economic growth. And temporary tax cuts do less good than permanent ones.

I cover it off over at the Spinoff.
The case for more substantial tax cuts is sound, but harder. It requires the government to be willing to cut programmes that deliver little benefit. And while the government has taken a sharper eye on the effectiveness of new spending programmes under the social investment approach, too much spending simply carries over, year after year, with little attention paid to whether that spending achieves its objectives.

Interest-free student loans cost the government $600 million dollars per year and mostly benefits students who are either from wealthy families or who are likely to go on to be higher earners themselves. That’s more than what it would cost to cut the 17.5% income tax rate down to 16.5%.

Deciding not to throw $300 million at the film industry over the next four years would allow the government to cut the 30% rate down to 29.5%.

Every billion dollar programme throws away the chance to cut the 17.5% income tax rate to 15.5%.

But, even worse, while the medium-term forecasts are very rosy, with plenty of room for tax cuts, the longer-term projections have health care and superannuation costs requiring substantial tax increases or substantial spending cuts – unless somebody finds the magic formula to reverse the long-term slump in productivity.

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