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Tax Freedom Day is Approaching

Tax Freedom Day 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 27 is the earliest Tax Freedom Day for New Zealand ", Mr Kerr said.

Mr Kerr said that the calculation of April 27 is based on central government core expenditure, which amounts to 32 percent of gross domestic product (GDP).

"On that basis, Tax Freedom Day is unchanged from the revised calculation for last year.

"As the economy grew over the 1990s, Tax Freedom Day moved forward until it reached April 11 in 2001-02. Since then, central government spending has accelerated relative to the growth in GDP, and the average taxpayer now works an additional 16 days a year to fund it.

"The government's forecasts indicate that a further two 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 outlays. 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 38.5 percent of GDP in 2006. On this basis, Tax Freedom Day falls 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 a week earlier in Ireland (9 May), Australia (11 May) and Switzerland (14 May), and almost a week earlier in the United States (16 May). Tax Freedom Day for the OECD as a whole falls about a week later than in New Zealand (30 May). By contrast 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 2006 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 over the economic cycle sufficient to finance New Zealand Superannuation Fund contributions and capital spending without compromising the debt objective. The government's fiscal policy means that the tax burden will remain at least at its present high level for the foreseeable future.

The minister of finance, Dr Michael Cullen, acknowledged last year that the present rate of growth in spending cannot continue. The coalition agreements subsequently entered into will increase spending. Although the government has initiated some reviews of government activities, it 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 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, among other things, 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.

24 April 2006


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