Singing the Budget Blues

Despite our 'rock star' economy over the past three years it has not increased Government income to the level expected and the Government has not been able to deliver its promised surplus. If income doesn't change, but priorities shift, then the money has to come from somewhere and when one sector wins there has to be a balancing loser. I applaud the increase for beneficiaries but it has come at a cost to Kiwisaver and tougher work obligations.

The only way to increase funding without winners or losers is to increase the size of the pot. The majority of the Government's income is generated through direct and indirect taxation and dividends earned from State Owned enterprises (SOEs). Over the past financial year the Government earned $61.5 billion from income tax (core revenue) and $27.9 billion from dividends (and sales of state assets). The total Government income for the last financial year was $89.4 billion and its expenditure was $92.2 billion. Government borrowing has reached $59.9 billion and the annual cost of debt repayments is currently around $3.4 billion. The most significant one item cost in the budget is our New Zealand Superannuation ($12.3 billion) and this is increasing by around $800 million a year as our aged population grows.

National Governments are so averse to taxation that even while we were in the middle of a global financial crisis they cut taxes for upper income earners. An increase in GST was supposed to offset the cuts so that they would be fiscally neutral, however the result was an annual loss of tax revenue of at least $1.6 billion a year. Even the word tax is difficult to swallow for this Government and when they feel forced to introduce one they feel obliged to give it another name.

The only way to increase tax revenue for the tax averse is an increase in economic activity, lifting incomes and growing exports. Wages and salaries for most workers have had modest increases over the past six years (around 50% received no increase in 2014). The fact that wages for at least 25% of workers are below a living wage (around 10% are underemployed), rather than collecting tax revenue from those workers, tax revenue has to be directed back in the form of Working for Families and tax credits at an annual cost of at least $4 billion a year.

The three areas of greatest economic growth have been the dairy industry, the Christchurch rebuild and the Auckland property market. The tax income from dairying is limited by the high levels of borrowed capital needed for a growing industry. The Government itself has had to invest a considerable amount to support the Christchurch rebuild and because we were short of skilled labour we have 1,000's of migrant workers whose incomes will have a limited impact on the domestic economy because they will be sending them back to their families overseas. Of course because we have no substantial capital gains or inheritance tax, it makes us one of the most attractive places in the world for generating capital gains through property speculation. This is great for speculators but generates little Government revenue. The Government is also spending over $1 billion a year in accommodation supplements as many low income earners can no longer afford rents as supply decreases and demand increases.

One of the largest beneficiaries of the New Zealand economy are the banks as they lend to support an overheated property market and dairy farm conversions. The difficulty of being reliant on Australian Banks for our borrowing is that dividends go back to Australia and they employ complex measures to avoid paying New Zealand tax. Expensive legal action in 2009 resulted in the recovery of $2 billion of unpaid dues.

Our rock star economy may not have resulted in significant wage and salary increases but our richest New Zealanders have seen substantial increases in income and capital gain (around 10-20% a year since 2011). Sadly few pay much tax as capital gain is generally exempt and clever accounting has seen around two thirds declare meagre personal incomes. Research established that we lost around $7.5 billion of revenue through tax evasion in 2011 and we are far more lenient on white collar crime than beneficiary fraud, despite it costing us significantly more.

To encourage outside investment in New Zealand the Government is also limiting tax revenue by giving tax breaks to the already highly profitable oil companies to encourage exploration and to the likes of Warner Bros. We even gifted a wealthy Saudi businessman $6 million in stock and equipment to help pave the way for a free trade deal.

The Government's reluctance to deal with tax evasion and capital gain has meant an increased focus on asset sales and SOE dividends to balance the books and top up the coffers. It put too much pressure on Solid Energy to produce more dividends which resulted in it going belly up and costing the Government more in keeping it afloat. While SOE share sales may have generated some influx of capital, the income from dividends will be reduced from now on (a short-term sugar fix and a long-term cut in income).

The Government had put a lot of hope on the dairy industry and had obviously learned nothing from their Solid Energy experience. Much was done to encourage greater milk production and farm intensification with an investment into more irrigation and a push to double primary exports by 2025. The sudden dip in milk prices from a global glut of powdered milk appears to have come as much as a surprise as the drop in coal prices. Our focus on one industry and lack of diversification has left us exposed and we still have a large environmental cost to manage from dairy expansion.

Bill English and his Government are often praised for sound economic management and steering us through the GFC, but close analysis reveals a different story. We are a resource rich country and have the potential to produce a variety of products and produce to global markets. The lack of investment in research and development and a limited range of exportable, value added products have made us vulnerable to fluctuating commodity markets. Despite the fact that our electricity is cheap to produce, power companies operating in a flawed market have been encouraged to pay high dividends back to the Government and their new private shareholders. Rather than using our electricity supply to provide us with a commercial advantage it is being used to increase Government revenue through SOE dividends (an indirect tax) and support the profits of private investors.

The OECD has estimated that we lost 10% of potential growth in 2010 because of having the fastest growing inequality in the OECD. The cost of supporting those on the lowest incomes is considerable and the value they add to the economy is limited. With the loss of a large portion of our manufacturing sector over the last 20 years or so we have lost a lot of skilled jobs. The Government's approach to procurement has also been at the expense of our skilled labour force.

The economy that this National Government supports does not work for everyone, in attempting to maintain the incomes and the privileges of the already wealthy it has meant a reduction in revenue and cuts to essential services. The fact that a $25 dollars a week boost in income for beneficiaries was greeted with such gratitude was an indication of how desperate those on our lowest incomes are. The price of a haircut is considered a weekly lifesaver for those who have little left to buy food after the rent and power bill is paid. Apparently this is what a successful economy looks like and this is the new normal for many New Zealand families.

Perhaps its just about the language and we should be talking about a wealth levy...?