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Average NZer Spends Third of Year Working for Govt


The Average New Zealander Spends a Third of the Year Working for Central Government

“Tax Freedom Day this year is 29 April, as far as the central government tax burden is concerned”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

Mr Kerr said 29 April is a red letter day because it represents the day in the year when the average New Zealander stops working for the government and starts working for themselves.

“In other words it means that since the beginning of January the average New Zealander has nationally spent one third of the year working for central government."

Mr Kerr said that the calculation of 29 April was based on central government core expenditure, which amounts to 32.4 percent of gross domestic product (GDP) according to the 2008 Budget Policy Statement.

"On that basis, Tax Freedom Day is one day earlier than that calculated a year ago when Tax Freedom Day 2007 was expected to fall on 30 April. However, revised data indicate that Tax Freedom Day actually fell on 28 April in 2007. Although expenditure was higher than expected, GDP increased more than proportionately."

Mr Kerr said that as the economy grew over the 1990s, Tax Freedom Day moved forward until it reached 10 April in 2001. Since then, central government spending has accelerated relative to the growth in GDP, and the average taxpayer now works an additional 19 days a year to fund it. The government's forecasts suggest that Tax Freedom Day will arrive a further two days later over the next 3 years.

Mr Kerr said that the Business Roundtable regarded government spending as the best measure of the overall tax burden because almost all government spending ultimately has to be financed from present or deferred taxation (borrowing). It ‘looks through' periods when the budget is in deficit or surplus. Personal tax cuts which are expected to be announced in the budget will not affect Tax Freedom Day, unless they are accompanied by a change in the ratio of spending to GDP.

Indeed the core central 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 OECD, is projected to be 42.4 percent of GDP in 2008.

On this basis, Tax Freedom Day would fall on 4 June.

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 a month earlier in Australia and Switzerland (4 May), about three 2 weeks earlier in Ireland (10 May) and Japan (14 May), and more than two weeks earlier in the United States (18 May).

Indeed on the basis of the broader measure, Tax Freedom Day for the OECD as a whole (29 May) falls before Tax Freedom Day in New Zealand. Moreover, a number of fast-growing Asian and other countries have levels of government spending, and hence tax burdens, that are well below the OECD average.

If the tax burden is measured as a ratio of taxation to GDP instead of spending, the picture of New Zealand as a highly taxed country is accentuated. The latest OECD figures show that the ratio of ‘general government total tax and non-tax receipts' to GDP for New Zealand is 45 percent for 2008, well above the average OECD ratio of 38.6 percent and higher than Germany's ratio of almost 44 percent.

"These calculations are important because of economic evidence that, beyond a certain point, government spending and taxation are harmful to 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 of around 40 percent or more of GDP.

“It follows as a matter of logic that a necessary (though not sufficient) condition for faster growth is that the share of government spending in the economy must be reduced, and the quality of spending improved, if New Zealand is to get back to the top half of the OECD income rankings", Mr Kerr said.

24 April 2008


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