Fiscal and macroeconomic context
New Zealand is currently in a recessionary period characterised by lower than average consumption spending and economic growth, and increasing unemployment. Short-term economic stimulus, such as that provided by a package of tax rate reductions, will encourage people to continue spending, invest in human capital and to increase employment opportunities. Such a stimulus can help smooth the economy’s regular business cycle, maintaining a higher level of economic growth than would otherwise have occurred. This is beneficial for New Zealand as a whole, particularly in terms of overall standards of living.
With a deteriorating global economic outlook New Zealand is expecting weaker economic growth in the next few years, resulting in slower tax revenue growth and increased government expenditure. In particular, revenues from GST and corporate tax are predicted to fall, and expenditure on benefit payments, superannuation, debt servicing and KiwiSaver are predicted to rise. This is likely to lead to sustained operating balance deficits and higher debt-to-GDP ratios. Under the fiscal responsibility provisions of the Public Finance Act 1989, the Crown is required to achieve and maintain prudent levels of total debt. This provides some constraints around the extent to which tax reductions can be made.
Accordingly, it is critical for any alterations to the tax system to take into account the fiscal and macroeconomic implications of these changes in the short, medium and longer-term. The BBLR framework assists in managing these implications through revenue recycling: that is through the elimination or modification of less growth-enhancing features of the tax system and the application of the savings towards a reduction in tax rates. All other variables held equal, this process should produce an overall improvement in economic efficiency as a result of lowering the level of distortion caused by tax rates (and the wider tax system).
The options available to fund personal tax changes are discussed below under the ‘Alternative Options' and ‘Preferred Option' sections of this statement.
