Thought Leadership

Opportunity and sacrifice: How do we pay for The Recovery Budget?

Alex Hart Alex Hart

Last year this Government delivered its first fiscal plan – the Wellbeing Budget. Fire up the money cannon, because 2020 is going to be the year of the Recovery Budget.

Massive spending is an essential way to protect New Zealand – our people and our economy – from the worst effects of the COVID-19 pandemic. But it does raise one important question: Who’s going to pay for all this?

Our debt is going from around 20% of GDP to more than 50%. To improve New Zealand’s financial position, we have to do exactly what any individual household does when it takes on a big mortgage – cut our expenses, find a way to earn more money, or both.

Can we let economic growth alone fund recovery?

We’re all hopeful that by the end of 2020 the worst of the COVID-19 recession will be behind us and the economy experiences strong growth. It’s possible that the economy will grow enough to generate higher tax revenue, slowly repaying the debt that we’re currently racking up without making any other sacrifices. Helen Clark has indicated she prefers this longer-term repayment strategy; it has the advantage of leaving all our current spending intact.

We may also be able to grow foreign investment with incentives to make New Zealand more attractive to big businesses, capitalising on the reputational boost New Zealand’s had from our crisis response. Once border restrictions are eased, changes to our immigration laws could attract highly skilled new residents to help with current and future projects, also boosting our economy and tax pool. That would be a good win.

But considering the 25% hit we’ve taken to our GDP, and the fact that slow repayment leaves us more vulnerable to another crisis, it seems likely the Government will want to do more than just wait it out and hope for the best.

Cutting superannuation spending

Assuming we can’t just wait for more taxes to help pay off our debt, how do we cut our spending? There are two obvious areas which can make an enormous difference: superannuation and taxes.

Superannuation for everyone over 65 is eye-wateringly expensive and has been a looming problem for a long time. As our population ages, the burden of paying this long-lasting benefit to an increasingly healthy (and often wealthy) group falls to a proportionately declining percentage of tax-paying New Zealanders. Even before we were hit with coronavirus, the superannuation equation was looking dangerously imbalanced.

Raising the superannuation age to 67, then gradually to 70, would accurately reflect how our quality of life has improved. The age for superannuation between World War II and the 1990s was 60, then it increased to 65 between 1992 and 2001. There’s no reason that couldn’t be repeated. The saving to the Government would be vast and with so much upheaval now, it might be a time when Kiwis will accept that a change like this is needed.

Superannuation could also be made available only to those who need it – the independently wealthy could be excluded by creating a wealth or income cap. In Australia, the majority self-fund their retirement, with only a few receiving government superannuation.

To help New Zealanders achieve more retirement savings in their personal accounts, the way KiwiSaver is taxed could be changed to make it far more attractive to invest.  Over time compulsory contributions by savers and employers could increase in small affordable percentage steps, just like Australia has done for almost 30 years. More money in KiwiSaver is a win for everyone because it means more funds for first-home buyers and it provides a pool of investment capital for local projects and business.

Tax changes to boost our income

This crisis is also a chance to think of the big picture and introduce tax changes that could help reduce inequality and spread the burden across society. These include:

  • Stamp duty or land tax. Australia, the UK and Singapore are examples of nations that collect a stamp duty on property purchases. Potentially we could limit this to purchases by foreign investors; although that would be only a small increase in revenue, it would be more palatable from a political perspective.
  • Capital gains tax. It has been considered and abandoned many times, but finding a way to tax capital is essential to reducing inequality
  • Estate tax, wealth taxes, or both. The bar can be set high, as it is in the USA, so this has only a modest impact on small estates but takes a bigger bite out of the wealthiest ones. This could be an alternative to CGT
  • Changing our tax brackets. Leaving the lowest tax brackets as they are, decreasing the tax rate in the middle, and then raising it for incomes above $300,000 for instance. The 33% tax paid on income over $70,000 is relatively high when compared to similar nations, so that could be reduced, but income over $300,000 or $400,000 could be taxed at 45% or even 50% which seems extreme but would not be outside the rates of some of our larger trading partners.
  • Taxing income vs capital. Our tax system already places a disproportionate tax burden on those with incomes rather than those with capital. A fair balance will be hard to perfect politically. Those at the very top of the income scale have options, and those with offshore capital will wave goodbye to the New Zealand tax system altogether.  The increase to 39% back in April 2000 is a classic example of these groups voting with their feet.

There’s no easy answer here, but without taxing wealth we are missing out on a big piece of the income puzzle which most successful nations have deeply integrated into their systems.

And don’t forget the deferred maintenance

As we strive to cut our spending and increase our incomes, this giant piece of property on which we’ve taken out a huge loan also needs a lot of work. Think of New Zealand as a large house filled with people, where a lot of the basic maintenance work has been deferred for many years. Ask any homeowner and they’ll tell you that the roof won’t wait to leak until you’ve saved up enough money to pay for it. While we pay back our debt, we need to strengthen and maintain our infrastructure: roading, schools, water supplies, rail, and national parks. Our health system also needs so be future proofed for potential future virus outbreaks. All at an immense cost.

A chance for change – but not without sacrifices

Households all over New Zealand are cutting their spending, looking for ways to increase their incomes, meet their debt obligations and still fix that leaky roof. The Government is facing all the same challenges and choices, on a national scale.

Hon Grant Robertson has a bigger stage than anyone in New Zealand has had for 25 years, since perhaps Roger Douglas. He has the chance to be bold and take strides towards improving the future of New Zealand. But no matter what’s in the Budget, or what decision he makes, every opportunity comes with sacrifices and costs.