Impacts of the preferred option

Fiscal impact

The table below shows the net operating balance impact of proceeding with:

• Changes to the personal tax rate structure;
• Introduction of the new independent earner tax credit;
• Discontinuation of the R&D tax credit from the beginning of the 2009-10 income year; and
• Changes to KiwiSaver.

The government intends to use one third of the savings from the repeal of the R&D tax credit to fund other innovation initiatives. The fiscal costs outlined above do not include that cost because they are outside the scope of the bill. However, once those innovation initiatives are put into effect the net costs of the total package will increase accordingly.

The fiscal impact of the four changes above yields net savings of $409 million over the five-year forecast period, with $322 million in ongoing net savings. The cost of tax rates and threshold changes were calculated using Treasury's micro-simulation model (known as Taxwell), based on 2006/07 Household Economic Survey data. The cost of the Independent Earner Tax Credit was calculated using Inland Revenue's model based on tax return data. Where appropriate, the above numbers include an offsetting tax claw-back (15.54%) on the basis that taxpayers will spend a portion of their tax cut on goods and services that attract GST and excise taxes. The cost of the tax changes above also takes account of consequential changes to New Zealand Superannuation payments.

If there is an increase in claims from businesses accelerating their R&D programmes to bring forward expenditure planned for future years, the savings for the 2008/09 and 2009/10 years from repealing the tax credit may be less than indicated in the table above. Given that sufficient information is not available to judge how claims will be affected, the figures given in the table constitute the best information available on the savings from repealing the credit.

The KiwiSaver changes in the table above include the removal of the ETC, the change in cost of the MTC, an adjustment in the cost of the ESCT exemption, and the removal of the Fee Subsidy.

The ETC cost was calculated at the Pre-Election Economic and Fiscal Update 2008 (PREFU08).

The MTC change in cost from PREFU08 is due to the change in the minimum employee contribution rate from 4% to 2%. For those earning under $52,000 per year, 2% of gross salary is not equal to the maximum MTC of $1040. As some people will top up their contributions to $1040 per year, an average contribution rate of 3% was assumed.

The ESCT exemption cost was adjusted through both a forecasting change and a policy change. The forecasting change was adjusted using updated enrolment data from PREFU08 (the previous cost was based on the Budget Economic and Fiscal Update 2008). The change in policy that affects the cost of the ESCT was the capping of compulsory employer contributions at 2%. Decreasing the ESCT cap meant that more tax will be collected through increased company profits due to the decrease in expected employer contribution costs.

The Fee Subsidy cost was also calculated at PREFU08.