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Tax and Economic Policy Launch - Rodney Hide Spch.

Tax and Economic Policy Launch: Speech by Rodney Hide

Friday 7 Jun 2002 Rodney Hide Speeches -- Economy

Breakfast Speech to Auckland Chamber of Commerce, Carlton Hotel, Auckland


ACT New Zealand is the freedom party. We stand for individual freedom and personal responsibility.

ACT's constitution trumpets that "individuals are the rightful owners of their own lives" and that government's proper purpose "is to protect such rights".

There should be no doubt that individual freedom is the guiding philosophical touchstone of the ACT party.

We support and promote policies that increase individual freedom and choice. We oppose those that don't.

We support freedom because people should be free and because freedom allows people to prosper. The freer a country, the more prosperous it is.

The ACT party doesn't believe that anything goes. Along with individual freedom must come personal responsibility. People do make decisions, those decisions have consequences, and people should be held to account for their decisions.

ACT's commitment to individual freedom and personal responsibility drives our policy on law and order. Those who commit crime must bear the consequences. ACT's commitment to individual freedom and personal responsibility drives our policy for major welfare reform. People can choose not to work - but they must accept the consequences of that decision. ACT believes that those who choose not to work should not expect to receive an open-ended wage from the taxpayer for the rest of their lives.

ACT's commitment to individual freedom and personal responsibility also drives our economic policy that we are launching here today.

ACT'S economic policy is designed to given New Zealanders greater freedom. It will allow Kiwis to keep more of the money they work hard to earn. ACT believes that the money that Kiwis earn is better for Kiwis in their own pocket than in government coffers. ACT's immediate two aims are to put New Zealand New Zealand's company rate of tax below that of Australia's and to give every worker in New Zealand a tax cut. We show today how these two aims can be achieved immediately.

ACT's five-year aim is to reduce the income tax rate in New Zealand to 18 cents flat for business and personal. We believe that a government focussed on its core priorities and core functions instead of funding an electoral lolly scramble can do that.

ACT's aim is also to reduce the cost and risk of doing business in New Zealand. ACT's commitment to individual freedom sees us always opposing the constant encroachment of the state into the rights of private property owners and the freedom to contract. The costs of political interference into private decision making is known as "red tape" and is hobbling New Zealand's growth potential. ACT is promising a bonfire of regulations.

ACT's goal is to boost New Zealand's growth potential by increasing the returns of doing business in New Zealand while reducing the risks and costs that heavy-handed and unnecessary government regulation imposes.

New Zealand's International Position

The OECD reports that the New Zealand Government takes 40 percent of our economy - a greater share than the OECD average. We are a heavily taxed people.

The Government share of the economy of our nearest neighbour Australia is 30 percent, in Ireland it is 30 percent, in the US it is 30 percent, in Japan it is 28 percent.

New Zealand Government taxes income and profits especially hard. Out of 30 OECD nations, only Denmark and Sweden have higher taxes on income and profits as a percentage of GDP.

Sixteen OECD nations have cut their company tax rates while Labour has been in Government. None have increased them. Against the world-wide trend, Labour boosted the top rate of tax on coming to office.

Our company tax rate is 33 percent. Australia has dropped its company tax rates by 6 per cent in two years. Australia's companies tax is now below ours at 30 percent. That gives Australian business a considerable advantage over ours. The OECD average is 31 percent.

We are a high tax country. Our aim must not be to match the tax rates of our competitors but to go below them. We must compete for skills and for capital by making New Zealand the most friendly place in the developed world in which to do business - not one of the more unattractive.

The outlook if we don't is clear from a recent Treasury report charting the fall of New Zealand down the economic ladder of the developed nations:

"It appears more likely that New Zealand's rankings among the OECD will continue to fall, and unless there is some improvement in our growth rates relative to the other OECD countries we could be amongst the lowest income group in the future."

We can do better - we must do better, much better.

Labour and National

Labour has no credibility in claiming that their prescription will grow the economy. They have increased taxes, and they have made doing business in New Zealand tougher with a host of changes to employment law, ACC, OSH. Labour's Finance Minister Dr Michael Cullen does not believe that cutting taxes boosts growth. In fact, he argues that the experience in New Zealand is that lower taxes for businesses produced less investment, poorer growth, and fewer jobs!

The evidence of the effect of cuttings taxes should now be so overwhelming that even the likes of Dr Cullen cannot deny it. To cite just one study: Professor James Gwartney and his colleagues studied 23 developed countries for the years 1960 to 1997 and found that reducing government spending by 10 percent as a percentage of GDP would boost economic growth by one percentage point.

All economists accept that taxes impose deadweight on an economy. Professor Diewert and Dr Lawrence have been studying the cost of tax for the New Zealand Treasury. I understand that they have estimated the deadweight cost of another dollar of tax to be about fifty cents. That's huge. That would mean that government would have to be getting a rate of return of fifty percent or better on the last billion dollars it spends to justify taking that money in the first place. It isn't. We are overtaxed compared to other countries. We are overtaxed comparing the costs of raising the tax and the benefits of government spending. Not surprisingly, the Treasury are sitting on that report.

National's prescription is moving in the right direction but is simply too little and too slow. Their immediate plan is to drop the top personal rate of tax from 39c to 35c, and drop the corporate tax rate from 33c to 30c. They then plan a one cent cut to both rates each year after that, so that by April 2006 the top personal rate will be 32c and the corporate rate will be 27c.

It's a mistake to keep the differential between company and personal tax rates. It's a mistake to not immediately drop the top rate of tax at least to where it was before Labour was elected. And it's a mistake not to ensure company tax rates below that of Australia immediately.

ACT's Tax Policies - Company Tax Below Australia's, Year One

ACT is the only party that has a tax policy that can credibly claim to return New Zealand to the top half of the OECD within ten years.

· ACT will cut personal taxes for all workers.

· ACT will cut the top tax rate from 39 percent to 28 percent.

· ACT will cut the lower rate from 19.5 percent to 18 percent, while keeping the low-income rebate.

· ACT will cut the Company tax rate to 28 percent - that's lower than Australia's.

Importantly, ACT would do this in our first budget.

And ACT would aim to move to flatter taxes of at the most 18 percent in five years.

We are the only party for real lower taxes.

McLeod Report shows ACT's policy desirable and affordable

Dr Michael Cullen spent $1 million proving the possibility and desirability of ACT's tax policy. The McLeod Report recommended a two-step personal income tax scale just like ACT is proposing. The McLeod Report also showed that dropping the top rate of personal tax and the company tax rate would be about $2 billion a year. Updating the calculations takes that figure to about $2.3 billion.

The $2 billion a-year cost to the government of dropping the top rate of tax can be fully funded by axing Michael Cullen's flawed super scheme. The scheme does nothing to alleviate the costs of super and, as Treasury have said, will do nothing to boost growth. The money would be far better used now to lower taxes and boost New Zealand's growth rate.

Dropping the bottom rate to 18 cents would reduce government revenue by about $700 million giving a total of $3 billion.

The overall costing is conservative. It assumes not one extra job, no extra investment, no extra business as a consequence of that tax cut. The tax cut in reality will cost less than $3 billion.

The cash surplus for that year is $3 billion - precisely the cost of the tax cut. The $1.8 billion that Dr Cullen would have played on overseas stock markets by political appointees would instead be returned to the pockets of New Zealanders.

The $3 billion compares to total government spending of $43 billion that year. The tax cut hands back only seven percent of what government spends.

The tax cut can be had without cutting one dollar from government spending.

Dropping the tax rate to 18 cents in the dollar flat would reduce government revenue by about another $3.5 billion in today's dollars. That too is achievable over five years. It would require government to concentrate on its priorities and core functions, welfare reform and an end to welfare payments to business.

It can be done. It just needs a hard focus on what government should and should not be doing and a commitment to making New Zealand internationally competitive to do business.

What the tax cuts mean

A working person on $40,000 a year would be $670 a year better off or $12.88 a week better off.

A working person on $60,000 a year would be $1670 a year better off or $32.12 a week better off. They would receive nothing from the tax cuts promised by National.

The big boost will be to business. The cost of capital will fall by 16 percent spurring investment and jobs. At present, someone on the top rate of 39 cents tax has to have their returns grossed up 64 percent to cover the tax they must pay. The gross up needed with a tax rate of 28 cents is just 38 percent.

ACT's tax plan is a plan for investment, for jobs, for higher wages, and for money in people's pockets.

Re-recognising private property

Red tape has increased inexorably for years. Labour has added dramatically to it.

The view all-pervading government is that Wellington knows best. The Labour Government Ministers especially believe that they know better how to run each business, farm and operation than those who built them, own them, and work them.

ACT fundamentally disagrees with Labour's "hands on" business-by-decree approach.

ACT says that New Zealanders should be free and that governments should protect property rights and uphold contracts, not ride rough-shod over both to tell New Zealanders what to do and when to do it.

The key to overcoming red tape is the recognition that private property and contract are the key to any successful economy and should not be ridden rough shod over by arbitrary government. We need a philosophical change in government.

We also need a bonfire of red tape. ACT policy is:

· A zero-base review of regulations.

· A Regulatory Responsibility Act to ensure all new regulations are cost benefit positive.

· A law change so that in future there is full compensation for the taking of property rights by either local or central government. ACT proposes this as an amendment to the Bill of Rights - the right to own private property and to be fully compensated when the State takes that property.

The ACT Party, as part of its survey of 9,500 North Shore businesses asked whether compliance costs are a significant problem. Over two-thirds (72%) responded that red tape is a problem.

The value of growth, the importance of freedom

Economic growth is not "just about money" but concerns many of the issues of vital relevance to all of us: the environment, income levels, jobs, superannuation, education, health care, even sporting success. And small changes in statistics that go almost unnoticed have a devastating effect over time. If we grow at two percent real a year we will be twice as prosperous as we are now in 36 years' time. That's pretty good. Imagine what we could each achieve as a nation if we were now twice as prosperous as we are, and could have twice as much of everything including health care and education. It would be massive. But if we grew at four percent a year - which doesn't sound that much more - we would in 36 years' time be four times richer than we are now - twice as rich as we would be if we grew just at two percent.

Small changes to a country's growth rate make a big difference over time. Our poor standard of living relative to other countries that we like to compare ourselves to - the USA, Australia, Singapore, South Korea - isn't the result of what happened last year or the year before that but is the result of decades of poor growth brought about by decades of poor government policy.

The New Zealand economy grew an average of three percent through the 1990s. In the five years up to Mr Peters' disastrous spend-up the economy grew an average of 4 percent. Last year, the Labour and Alliance Government, with the best economic conditions for a generation, managed only a paltry 2.3 percent.

The growth rate per capita has fallen continuously under the Labour-Alliance Government. It was 3.4 percent for the year ended December 1999. It was 3.3 percent for year ended December 2000. It was 1.4 percent for the year ended December last year. The result of the present government's policies has been continually falling growth.

We can - and we must - do better. The prescription is freedom. The only party promising it is ACT.

Freedom and lower taxes is the only prescription that will put New Zealand back in the top half of the OECD in 10 years, provide the additional standard of living that we need to restore us as a leading nation, and deliver the high standard of health, education and personal security that New Zealanders are crying out for, and deserve..

For more information visit ACT online at or contact the ACT Parliamentary Office at

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