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Treasury urges govt not to rush on tax review, supports Reserve Bank PTA changes

Thursday 7th December 2017

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The Treasury warned the government's planned review of the tax system will be too rushed and suggested it extend the timeframe along with other reviews of New Zealand's monetary and fiscal policy settings.

Last month, the government announced former Finance Minister Michael Cullen will lead the tax working group, tasked with brainstorming a fairer and more balanced tax system. It will come up with a series of recommendations by February 2019 which the government will then use to inform its policy direction at the next general election.

The working group has been told to consider the economic environment over the next five-to-10 years and how that's affecting changing business models, demographics and business practices; whether some form of housing, land or capital gains tax would improve the system; whether a progressive company tax with lower rates for small businesses would improve the system and business environment; and what role tax can play in delivering environment benefits.

In its October briefing to incoming Minister of Finance Grant Robertson, released today, the Treasury recommended the working group include the treatment of capital income and assets in the tax system, "allowing for the consideration of a wide range of options", but warned that the group will not be able to undertake a comprehensive assessment of all aspects of the tax system in its indicated timeframe. It suggested a longer timeframe, or "further targeted reviews of strategic issues in the tax system." 

The Treasury also said the government may want to look at the corporate tax rate, which at 28 percent is above the OECD median, but said it could look at ways to reduce effective tax rates on business investment such as modifying depreciation rules. "Significant misalignment between personal and company tax rates could put pressure on the integrity of the revenue base," it said.

The agency said the government has signalled significant monetary policy priorities, including reviewing the Reserve Bank Act to broaden the central bank's objectives. The agency suggested Robertson use the signing of the policy targets agreement with the next governor of the Reserve Bank, which he will do by March next year, as "an early chance to reconsider how monetary policy objectives are specified" and said it may be a good time to consider broader issues about governance and monetary and financial stability frameworks in the act.

The Treasury recommended a review of the statutory framework for financial stability policy to ensure the country can respond to emerging financial risks.

"The growth in scope of prudential policy over recent years makes it timely to stand back and consider whether the statutory framework is fit for purpose, particularly given there are aspects of our approach that differ from international norms," it said. 

The Treasury said progress towards Labour's budget responsibility rules can be achieved through greater increases in operating and capital expenditure than in previous budgets, as the government indicated in its pre-election fiscal plan. The agency is currently reviewing aspects of the fiscal management approach, which gives fixed baselines to government agencies with no automatic adjustments for inflation and other pressures in each budget, meaning spending comes through the budget process and allowances. Robertson must decide whether to keep this approach.

The government has said it plans to reinstate contributions to the New Zealand Superannuation Fund in the current financial year, and Treasury recommended establishing a review of the fund's contribution and withdrawal formula "to ensure that settings support the objectives of the NZSF, including intergenerational fairness."



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