Economics: Tax: Key’s elephant in the room

Slashing public expenditure isn’t the only way to balance the budget, British political writer Mehdi Hasan told readers of The Guardian earlier this year. We need to talk about tax, too, he argued.
He did not pretend to like paying taxes but he recognised how tax revenues civilised country by funding high-quality public services, the welfare state, national defence, much-needed infrastructure projects and so on. Progressive taxation of income kept inequality in check, for good measure, by redistributing from the rich to the rest.
There were just two ways to close fiscal deficit when an economy is operating at full potential, Hasan maintained. One is to cut spending, the other is to raise taxes (the Key Government’s plans to sell shares in state assets have the same revenue-raising effect).
Hasan’s beef was with deficit hawks who assume that cutting spending is the preferred route to fiscal balance, rather than raising more revenue via the tax system. Fiscal policy had been reduced “to sterile debate over public spending” in recent years and “deficit reduction” had become convenient euphemism for cutting public expenditure.
Britain’s deficit had been caused not by rises in public spending, however, but by collapse in tax revenues triggered by the economic crisis. Poll after poll in Britain showed overwhelming public support for tax on bankers’ bonuses; mansion tax on multimillion-pound properties; windfall levy on the oil and utility companies; Robin Hood tax on financial transactions; and one-off wealth tax of 20 percent on the richest 10 percent of households. Political leaders accordingly had to lift their self-imposed taboo on discussing tax, if they were serious about the deficit.
Tax has not been taboo topic for political discussion in this country. But the Key Government, having reduced income taxes when it lifted GST, is determined not to raise them again. Nor will it entertain the idea of special levy to deal with the particular challenge of rebuilding Christchurch.
Yet the financial statements for the first seven months of the Government’s financial year (to 31 January) show deficit resulting from too little revenue rather than too much spending. Finance Minister Bill English highlighted that reality when asked about the Government’s financial position the same day as the financial statements were published. He said: “They show core Crown tax revenue was $946 million below the pre-election update. Total revenue was $1.4 billion lower, offset by lower core Crown expenses of $1.2 billion. This has led to the operating balance before gains and losses being about $470 million below forecast. These numbers include recognising the expenses of the severe earthquake in Christchurch on 23 December.”
The Government had to follow the same processes as many households, businesses and other organisations, English argued. Through the tougher times the Government had been running up debt. As the economy picked up and the outlook improved, it must tighten up, to save more – as New Zealand households were doing – and to start repaying that debt.
Among other things, this required the public service to change the way it delivers services over the next few years. particular challenge would be “to keep delivering good public services, and improving them, at the same time as spending the same, or less, money”. This presaged yet another assault on departmental budgets.
Yet core government services expenditure was $184 million lower than forecast. Under-spending by the Canterbury Earthquake Recovery Authority accounted for around $72 million of that. The rest was explained by “small variances” across number of departments. In other words, they were spending less than budgeted.
English acknowledged the lower tax revenue in the public accounts was “consistent with probably collecting less tax in this financial year than was expected in the pre-election update”. The accounts showed PAYE three percent lower than the pre-election forecast; GST was four percent lower; the corporate tax take was five percent lower. But English steers clear of new revenue-raising measures, other than the one-off sales of shares in few state companies. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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