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Treasurer Speech - Tax Cuts

Hon Bill English

Treasurer

MP for Clutha-Southland
Speech to Tauranga National Party
Tauranga, 7am, 6 July 1999

Embargoed until delivery, check against delivery


I'd now like to set out my thoughts on an issue that has been the subject of
an increasing amount of media and public attention and that all of you will
have some views about - tax.

There are two points in the stories you have seen that are true. The
Government wants to lower taxes, and this weekend I will be setting out my
proposals for the next steps in our tax reduction programme.

This Government has lowered taxes, and will continue to get them down because
we believe people have a right to keep as much of their hard-earned money as
possible.

We want to see people rewarded for their work.

We want there to be an incentive to work, and as many people in jobs as
possible.

We want there to be better returns on education and skills.

And we want families to be better-off. We know that doesn't come from
benefits - you can't make people better-off by paying them benefits - but from
work.

The Government is also well aware that our businesses are better placed
against competition from overseas when costs, including tax, are lower, and we
know that lower taxes help economic growth.

This is because individuals and small and large businesses in the private
sector drive economic growth and create jobs, not the government. Government
can't do those things and shouldn't do those things and too much government,
with high taxes, stifles growth.

We need people investing, taking chances, and working hard and knowing it's
worth the effort.

Internationally the better performing economies have lower overall tax takes
and dynamic private sector businesses.

This mix is understood around the world, and by the modern left-wing in
politics. Tony Blair in Britain pledged not to raise taxes and is now
lowering them. The Social Democratic party in Germany has already announced
tax cuts to help the average earner and make Germany more competitive.
Japan's initial response to its slowdown was to cut taxes to stimulate growth,
and Australia is moving to reform its tax system and lower corporate rates.

In New Zealand as well, there is now a far greater understanding of the role
of tax.

PAYE has meant the collection of most tax is painless. We would have had a
different attitude to taxes earlier if people had to write a cheque to the
government each week, instead of receiving pay-packets with the tax already
out.

At that point it's pretty clear that government money is taxpayer money.
Especially when, if government expenditure is averaged out, that weekly cheque
from every man woman and child would be around $180.

Even so, this debate has moved a heck of a long way since we first started
seriously designing the first of our major tax cuts in 1995.

Since the Budget the feedback I've got from middle New Zealand has been
interesting. People have been saying: we know government assistance is being
targeted, we understand that, and it's fair. But we don't get any of that.
For us to get ahead, we need lower taxes.

The public likes the idea of lower taxes. Having seen their take-home pay
improve, they like the idea of keeping more of their money - and they now know
that tax cuts don't have to "cost" anything.

In the last six years:

Net public debt has been slashed by more than half

Spending on education and health has gone up by more than 40%.

And we're now leaving $3 billion of taxes and targeted assistance in
peoples' pockets.

A dynamic growing economy, jobs, better incomes, less debt, more and better
quality health and education spending, and lower taxes are not mutually
exclusive. This Government has showed, given good policy, they can all be
delivered at once.

This is why we are now working on the design of the next stages of our tax
reduction programme.

Until 1996 our top income tax rate cut in at the level of the average wage.

The first stage saw a significant reduction in the middle tax rate - from an
effective rate of 28c to 21c in two steps in 1996 and 1998. And the threshold
at which this rate applied was pushed out from just under $31,000 to $38,000.

The middle rate was chosen as this was the best way of benefiting the majority
of workers. So anyone working and earning more than $9,500 a year - that is
anyone in full-time work - now pays less tax.

This has increased the spending power of working families.

From July 1 last year, a single income family with four children under 13
which earns $35,000 will be receiving $118 a week more in the hand - more than
$6,000 a year - as a result of tax cuts and family assistance improvements
since July 1996.

Obviously, the tax cuts alone have not delivered all of this increase in
income. With the tax reduction package aimed at low and middle income working
families, a number of other components were introduced to target the gains.
Again these were introduced in steps in 1996 and 1997.

Family support was increased by a total of $5 per child a week.

Guaranteed Minimum Family Income rose by $12 a week.

And a new Child Tax Credit was introduced for low income working families,
giving many families another $15 for each child a week.

I should also remind you, that we included in the tax reduction programme in
1996 measures to further encourage beneficiaries into the workforce.

The major move was to encourage people receiving benefits to become involved
in part-time work and so lift their incomes and move closer to self-reliance.
For all main benefits, people are now allowed to earn up to $80 a week before
they lose any of their benefit. Further, people receiving Domestic Purposes,
Widows or Invalids Benefits can earn $180 a week instead of $80, before their
benefit reduces at more than 30 cents in the dollar.

For someone receiving the DPB with two children earning $180 a week from
part-time work, the tax package and abatement changes have been worth an extra
$62 a week.

These changes had a rapid effect on the number of beneficiaries working. In
April 1997 there were 3,500 more people receiving the DPB who had part-time
work worth more than $80 a week, than in July 1996.

What became a three year programme from 1996 to 1998 is now leaving over $3
billion in New Zealanders' pockets.

This represented a reduction in government revenue of around 10%. But
economic growth, in part stimulated by lower taxes has seen government revenue
in 1995/96 of $32.2 billion, after $3 billion worth of tax cuts, increase in
1998/99 to $36.5b.

Obviously, however, we had to be running large surpluses to sustain tax
reductions of that scale and our other economic and fiscal priorities at the
same time. In 1995 we set down various pre-conditions before we would move on
this programme.

With the impact of the Asian Crisis and now two years of drought, and a
corresponding reduction in our forecast surpluses, we do not have the capacity
for large scale tax reductions at this time.

But with the economy now recovering steadily, and stronger than forecast
growth flowing through to higher revenue flows and a stronger fiscal position,
we are able to look at continuing, relatively small, affordable tax
reductions.

This Government is not about to do anything damaging to the economy, or that
raises doubts about our commitment to good fiscal management.

Signals about the government's fiscal management and debt reduction are very
important when the current account remains around present levels, and we are
also determined to maintain high quality social services.

As I have said before, tax cuts do not have to come at the expense of
education or health or police.

Over the next three years we already have $3.6 billion available in total for
additional initiatives - that is $600 million in extra spending each year.

In this year's Budget the Government funded around $146 million in tax
reductions - the removal of stamp duties, and new Parental Tax Credit - within
a similar sized provision.

This demonstrates that through effective management of its expenditure the
Government can reduce debt, increase resources to priority social spending and
undertake some tax reductions, while remaining within budget.

Future tax cuts will occur alongside:

increasing fiscal surpluses

decreasing debt

and more spending on quality social services

We are not setting any rigid pre-conditions for debt levels as we did in 1995
because net public debt, at under 22% of GDP and falling now presents far less
risk than in 1994/95 when it was still at 37.6%.

Our plans are responsible and have been carefully considered.

This includes economic factors. We need economic growth to continue and we
will ensure there is no additional risk from the current account, and that
inflation and interest rates won't be significantly affected.

We want lower taxes - but we want other things too. We recognise that taxes
pay for these communal services - our health and our education and justice
systems.

But this government recognises where those taxes come from. Out of the
pay-packets of working New Zealand.

People shouldn't be punished by taxation for trying to get ahead through work.

It is that work that builds New Zealand's future.

That's why Labour's proposal to raise taxes is bad news for New Zealanders,
for jobs and for economic growth.

At least the public now knows where it stands. Helen Clark has confirmed
Labour's natural instinct is to raise taxes. And Jim Anderton will be doing
everything in his power to raise them more.

That is the stark difference between the Government and Labour and the
Alliance

We believe we should be very careful with what is your money, and take as
little as is necessary in the form of taxes.

They want to spend your money for you.

New Zealand does not have the living standards that we aspire to. Lowering
income taxes is one way of making progress on that front.

The idea that you can raise taxes and get ahead - that you can tax your way to
prosperity - just isn't credible.

ends

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