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Notes of third meeting of Long-Term Fiscal External Panel

A summary of proceedings of the third meeting of the Long-Term Fiscal External Panel, which met late last month, is now available on-line. The independent panel is tasked with critically reviewing the initial research, analysis and modeling assumptions of the Treasury as the department prepares its next Statement on the Long-Term Fiscal Position due to be tabled in Parliament in 2013. It is chaired by Pro Vice-Chancellor and Dean of Commerce at Victoria Business School, Professor Bob Buckle.


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[Full summary: LTFPanel3Summary.pdf]

Long-Term Fiscal External Panel

Summary: Session Three – Retirement Income and Tax Policy Analysis and Choices

25 October 2012 (9:30am-4:30pm), Victoria Business School, Level 12, Rutherford House

The third External Panel session considered policy options that might improve the long-term fiscal position by managing the spending pressures arising from expected demographic changes. The options were in the areas of education, retirement income, taxation and working-age welfare. The policy areas of health care, justice, natural resources and the Crown's balance sheet will be considered in the next session.

The policy options presented to the panel were generally considered through the lens of the various dimensions of the Treasury’s Living Standards Framework. The dimensions are: fiscal sustainability, economic efficiency, risk and uncertainty, equity, and social infrastructure.

The analysis in this summary is based on draft work. The analysis may be refined, amended or strengthened in the 2013 Statement on the Long-Term Fiscal Position.

Draft research papers which informed the discussion at the third panel session, and which will inform discussion at the fourth session to be held on November 29, will be put online with the summary of the fourth session.

HIGHLIGHTS – PANEL DISCUSSION

There was support for the Treasury’s approach of considering a wide range of tax and spending policy options that might address long-term fiscal pressures. In each case, the Treasury should be clear about the rationale for the policy change being considered. Apart from fiscal savings, potential policy changes need to be articulated on the basis of clear principles and address how any transition to altered policy settings might be managed.

The following points emerged from discussion. Not every member of the External Panel necessarily agrees with every point:

• An enduring response to managing the long-term fiscal pressures will likely involve a package of subtle policy changes implemented gradually. An ageing voting population and the MMP environment mean that one-off or abrupt policy changes may be inappropriate.

• The impacts of policy changes on all New Zealanders, and especially those of lower incomes, should be carefully considered - in terms of fairness and of securing policy responses that will endure.

• The panel raised questions about the merits of some of the tax options and were concerned to ensure the efficiency, distribution and administrative cost, sustainability and coherence features of tax options were considered and well founded and that there was a clear rationale for choosing an option, especially if there were proposals to consider introducing a new tax base. For example, if the rate of GST rises, there may be greater risk of political pressure for exemptions to be introduced, reducing GST revenue and adding to complexity, thereby reducing the efficiency and integrity of GST.

• The panel also discussed the merits of broadening the tax system by means of either a land tax or more comprehensive capital gains tax. Concerns were raised over the interpretation of the purported economic efficiency properties of a land tax. Some argued that re-introduction of a land tax could have adverse implications for investment and may also mean pressure for the sorts of exemptions that contributed to it being discarded in the 1980s. While some acknowledged that in principle a capital gains tax may be attractive from the point of view of improving the integrity of the tax system, revenue from a capital gains tax may prove to be volatile and there are administrative challenges in administering a sound capital gains tax.

• Treasury’s base projections fix the Crown’s tax revenue at a set ratio to GDP from 2020. Some members suggested that Treasury consider an alternative projection of revenue based on the indexation of personal tax rate thresholds to consumer price inflation, from a certain point in the future. Doing this would still prevent “bracket creep’ to some extent while securing more revenue to the Crown over the long term than would occur in the Treasury’s base projections. On the basis of current Treasury projections, this could generate extra revenue equivalent to about 2% of GDP by 2060.

• Retirement income policy settings have been changed many times since the 1970s and some argued that any further changes should be based around the existing broad framework. Concerns were expressed about options that would result in greater levels of poverty among older people or that would be complex and inefficient to administer. Treasury should focus on fewer options, with detailed analysis of the trade-offs, and a clearer rationale for why they had been chosen.

• On modelling welfare spending, there was support for the Treasury projections in the next Statement to no longer assume that welfare benefits will grow at only the rate of inflation indefinitely. The assumption seems implausible, given expected wage growth.

• Some members suggested analysis into why the improvement in New Zealand’s labour quality is not leading to material improvements in labour productivity. This could inform the discussion of priorities for state spending over the long term, including how best to invest resources freed from the “demographic dividend” within education spending. (The demographic dividend arises from a smaller proportion of the population being young and involved in formal education).


[Full summary: LTFPanel3Summary.pdf]

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