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Tax Freedom Is Approaching

21 April 2005

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, April 24 is the earliest Tax Freedom Day for New Zealand", Mr Kerr said

Mr Kerr said that the calculation of April 24 is based on central government core expenditure, which amounts to 31 percent of gross domestic product (GDP).

"On that basis, Tax Freedom Day is two days later than the revised calculation for last year (April 22).

"As the economy grew over the 1990s, Tax Freedom Day moved forward until it reached April 12 in 2001-02 and 2002-03. Since then, central government spending has accelerated relative to the growth in GDP, and the average taxpayer now works an additional 12 days a year to fund it.

"The government's forecasts indicate that a further five tax days will be added over the next three years", 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 39 percent of GDP in 2004. On this basis, Tax Freedom Day would fall on 22 May.

This broader measure highlights the extent to which New Zealand is a relatively high-taxed country. Compared with New Zealand, Tax Freedom Day on this measure comes more than two weeks earlier in Ireland (5 May) and more than a week earlier in the United States (11 May) and Australia (12 May). Tax Freedom Day for the OECD as a whole falls a week later than in New Zealand (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 government lifted its long-term spending objective from under 30 percent of GDP to 35 percent in the 2000 Budget Policy Statement.

In the 2005 Budget Policy Statement, the government confirmed its intention to maintain debt at prudent levels, with gross sovereign-issued debt slowly reducing as a percentage of GDP over the longer term, and to run operating surpluses on average across the economic cycle sufficient to meet New Zealand Superannuation Fund contributions and capital spending pressures and priorities.

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. Although the minister of finance, Dr Michael Cullen, has recently acknowledged that the present rate of growth in spending cannot continue, the government has not indicated that it plans to reduce spending and taxes to enhance economic efficiency and boost growth.

"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.

“In 2002, Dr Cullen said that it would be apparent by the middle of last year (2004) whether the government was on track to lifting New Zealand’s trend growth rate to a higher level. The Budget projections next month will confirm once again 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.


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