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Opinion: Don't expect an imaginative approach in Cullen's budget

By Simon Louisson of NZPA

Friday 13th May 2005

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Finance Minister Michael Cullen will next week bring down his sixth budget but don't look for a more imaginative approach to tax issues than his previous five efforts.

The former history professor has had a fortuitous run with the economy during his tenure, although New Zealand's outperformance in the 2000s has largely been fuelled by private sector borrowing.

The Government's goal of returning New Zealand to the top half of the OECD club of rich nations requires a paradigm shift in thinking - something Cullen has demonstrated a distinct lack of flair for.

"He should do something big," said Thomas Pippos, managing tax partner at accounting firm Deloitte.

He says Cullen is a tinkerer.

The Government will make much noise about a myriad of tax cuts to be announced on Thursday, and to the uninitiated these will be made to appear numerous and significant. Many, such as accelerated depreciation rates and changes to fringe benefit tax have been announced. Others will be handing back (minus the bureaucracy costs) some $360 million to be collected from the new carbon tax.

The noise about the cuts will be designed to overwhelm but the changes will not amount to anything significant or radical.

Cullen has a wonderful opportunity to make significant change. He is presiding over massive budget surpluses - amounting to around $6 billion, or 5-6% of GDP.

In his effort to dampen his Labour Party ministers' usual propensity to spend, and to appear conservative, Cullen has resorted to focusing the budget on the cash surplus rather than the so-called operating surplus.

It's another excuse to do nothing, says Pippos. The cash surplus is nearly always going to be close to balance.

The operating surplus, which Cullen used to focus on, includes such large items as student loans and the multi-billion contributions to Cullen's Super Fund. Most students repay their loans and the vast bulk of the operating surplus is money in the bank.

Critics say focusing on the cash surplus is misleading.

ACT's finance spokesman Richard Prebble has accused Cullen of "cooking the books" by not using the same reporting measures as used in previous years.

Cullen's has proved a dogged adherent to economic orthodoxy, rejecting radical restructuring of the type that helped transform Ireland from a near basket case to a world leader.

Ireland's economic miracle was partly created by its decision to cut its corporate tax rate of 32% to just 10% for manufacturing and export activities.

Pippos cites Holland as an another example, which plans to introduce a raft of changes to tax rules to attract foreign investment - seen as crucial to lifting living standards. The centrepiece will be a cut in the corporate tax rate to 20% for company profits up to 41,000 euros ($NZ73,250) and to 26.9% for amounts above that.

If New Zealand wants to do something to attract foreign capital here, the most obvious method is to lower the corporate tax rate from the current 33%, Pippos said.

Cullen argues that cutting the corporate rate is effectively only giving foreign companies a break because locals will have the tax clawed back through higher income tax when dividends are distributed. He says measures such as the planned accelerated depreciation rates will be of more practical assistance.

But Pippos says foreign companies make decisions at a more basic level.

"The reality is that when foreign organisations and multi national organisations look to different jurisdictions to where they should set up, when it comes down to tax, it's hard to get past the headline rate.

"It either attracts them or it doesn't."

The McLeod Report on tax issued two years ago recommended a 15 percent rate for new companies, and while that would bring its own inequities, all systems have problems, says Pippos.

As well as a lower corporate tax rate, the next most basic step is to align the corporate rate with the top marginal rate.

"It's bad policy not to have them aligned. It creates a whole lot complexity," says Pippos.

Cullen has indicated he has no intention of doing anything about aligning those rates. Nor will he make adjustments to the "fiscal creep" that has put a quarter of full-time workers into the top tax bracket.

Originally, when he introduced the 39% rate for income over $60,000 in 1999, only 5% of taxpayers were caught.

United Future MP Gordon Copeland estimates that if adjusted for inflation, the top tax bracket should not kick in until people earn over $68,000.

Cullen says New Zealand's top marginal rates are still lower than most other wealthy nations. However, New Zealand incomes are lower and the higher marginal rates kick in at a relatively low threshold.

Australian has adjusted its thresholds in the last few years as well as making across the board cuts.

Australian Treasurer Peter Costello this week delivered his third income tax cut in three years in a $A22 billion ($NZ23.5 billion) package.

National's finance spokesman, John Key argues the steep rise in emigration to Australia, particularly of skilled workers, is partly the result of more attractive tax rates there.

National's welfare spokeswoman Judith Collins says the contrast is stark.

"Australia is rewarding workers with big tax cuts, and reforming welfare. Here in New Zealand, Labour is handing out welfare to working families and loading on still more taxes," she said.

Even on the issue of New Zealand's chronic lack of savings front Cullen has preferred tinkering to radical reform.

Independent think tank the New Zealand Institute recently came up with a radical $4 billion scheme whereby state subsidised savings accounts would be opened for each person at birth to allow them to save for their education, first home and pension.

Cullen quickly rejected the scheme as too pricey and will instead opt for small scale schemes. Some first home buyers will get assistance with deposit guarantees and a framework for workplace super will be established. Help to save for education has been put in the too hard basket for now.

Business NZ chief executive Phil O'Reilly believes that if New Zealand fails to get its tax levels right, it won't be able to compete effectively for skills, investment and growth.

"This is the pointy end of competitiveness.

He, and the political right, argue for a lowering of the tax burden in general. However, it could be argued that to lift New Zealand up a gear there needs to be a reappraisal of the way we are taxed, rather than necessarily how much we are taxed. For example, Russia a few years ago moved to a flat income tax and was surprised to see net revenues rose.

O'Reilly said New Zealand business will be watching budget decisions with interest, but if I were him I would not be holding my breath.

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