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Tax Freedom Is Approaching

Thursday 22 April 2004

Tax Freedom Is Approaching

Tax Freedom Day in New Zealand is important because it represents the day in the year when the average New Zealander stops working for the government and starts working for themselves, the executive director of the New Zealand Business Roundtable, Roger Kerr, said today.

"As far as central government is concerned, today, April 22, is the earliest Tax Freedom Day for New Zealand."

Mr Kerr said that the calculation of April 22 is based on central government core expenditure, which amounts to 31 percent of gross domestic product (GDP).

"On that basis, Tax Freedom Day is little changed from last year (April 23)", Mr Kerr said.

The Business Roundtable regards government spending as the best measure of the tax burden because almost all government spending ultimately has to be financed from present or deferred taxation (borrowing). Because the government is running a fiscal surplus (taxation is higher than spending), Tax Freedom Day would be later if a comparable taxation measure were used.

Indeed the government spending measure understates the true tax burden because it leaves out or underestimates elements of government spending such as local government. If these are included, total government spending in New Zealand, as measured by the Organisation for Economic Cooperation and Development (OECD), is projected to be almost 40 percent of GDP in 2004. On this basis, Tax Freedom Day would fall on 26 May.

This broader measure highlights the extent to which New Zealand is a highly taxed country. Compared with New Zealand, Tax Freedom Day on this measure comes more than two weeks earlier in Ireland (8 May), Australia (10 May) and the United States (10 May), and at a similar time for the OECD as a whole (29 May). A number of Asian and other countries have levels of government spending, and hence tax burdens, that are well below the OECD average.

The OECD has revised its basis of calculating general government total outlays in the past year. This will delay the arrival of Tax Freedom Day in most member countries compared with 2003.

The government lifted its long-term spending objective from under 30 percent of GDP to 35 percent in the 2000 Budget Policy Statement. In the 2004 Budget Policy Statement, the government stated that rising surpluses are required to achieve its high-level fiscal objectives. According to the government, this requires core Crown expenses (plus the net payment/withdrawal to the New Zealand Superannuation Fund) to average around 35 percent of GDP over the horizon used to calculate NZS contributions. The government's fiscal policy means that the tax burden, together with contributions to the New Zealand Superannuation Fund, will remain at least at its present high level for the foreseeable future.

In the 2004 Budget, the government intends to increase spending primarily on policies that redistribute income. It does not plan to reduce spending and taxes to enhance economic efficiency and boost growth. Government spending is forecast to rise by 0.5 percent of GDP next year, which will delay Tax Freedom Day by three days.

"These calculations are of interest because of economic evidence that, beyond a certain point, government spending and taxation hamper economic growth”, Mr Kerr said. “No country has achieved per capita growth rates of 4 percent or more a year on a sustained basis with general government spending approaching 40 percent or more of GDP.

“Finance minister Michael Cullen has said that it will be apparent by the middle of this year whether the government is on track to lifting New Zealand’s trend growth rate to a higher level. The Budget projections next month will almost certainly confirm that it is not. It follows as a matter of logic that the share of government spending in the economy must be reduced (and the quality of spending improved) if the government is serious about its aim of restoring New Zealand to the top half of the OECD income rankings", Mr Kerr said.


ENDS

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