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Pre-Election Economic and Fiscal Update

Pre-Election Economic and Fiscal Update

"The two key points that stand out from today's Pre-EFU are that the economy's medium-term growth rate is falling away, not picking up, and that there is ample room for tax reductions", Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

Mr Kerr said that although the government's "top priority" goal was to increase New Zealand's growth rate to restore New Zealand to the top half of the OECD income rankings, real growth in GDP over the Pre-EFU forecast period is expected to be lower than in Australia, the United States and New Zealand's trading-partner average.

The growth rates of both real GDP and real GDP per capita are also projected to be lower than the average rates achieved since the early 1990s.

The Pre-EFU confirms that both expenditure and tax revenue growth rates are projected to continue at high levels.

Core Crown expenses are expected to rise by a huge 2% of GDP over the period to 32.5% of GDP - up from 29.7% in 2004. This will push out Tax Freedom Day - the day average taxpayers stop working for the government and start working for themselves - by another week.

Also, compared with the May Budget forecasts, the government is expected to take in an additional $2.3 billion of tax revenue in the three years to June 2007.

"Clearly a combination of constraining excessive increases in spending, reducing over-taxing (by lowering the operating surplus), and adopting growth-oriented policies that would boost employment and reduce spending on welfare benefits, would leave plenty of latitude for tax reductions", Mr Kerr said.

The Business Roundtable also favoured the inclusion of tax and expenditure limits in the Public Finance Act to increase fiscal discipline.

"By comparison with tax reductions, the Working for Families package is an inferior strategy. It harms growth by increasing the average effective marginal tax rate and does little to encourage moves from welfare to work.

"The argument that a well-designed medium-term programme of tax reductions would put pressure on inflation and interest rates is simply invalid and would not be supported by any competent economist.

"New Zealand has not been in a better position to reduce taxes for many years. Cutting high effective personal and business tax rates is an obvious strategy to lift New Zealand's sagging growth rate and return more of the economic dividends to taxpayers", Mr Kerr concluded.

18 August 2005


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