Macroeconomic impact
The macroeconomic effects of the entire package of changes are difficult to predict with certainty, particularly given the current macroeconomic environment and the fact that R&D and KiwiSaver are relatively new initiatives. However, Treasury considers that the key macroeconomic effects derive primarily from the tax cuts (including the IETC) and it is the effects from the tax cuts that are most immediately able to be modelled. The discussion below relates to the tax changes over and above those made through the 2008 tax cut package.
Personal tax changes
The impact of personal income tax cuts and the IETC on the economy are seen mainly through greater aggregate demand arising from higher private consumption driven from larger disposable incomes. Treasury has estimated that the proposed changes to personal taxes could increase growth in real GDP by approximately 0.3% beyond the level of growth there would have been in the absence of the changes, over the year to 31 March 2010.
This estimate assumes the tax changes will only impact on the labour market through increased employment (i.e. higher consumer spending boosts the demand for labour). No change in the supply of labour from the tax cuts has been assumed in the modelling, as there is insufficient reliable data on this variable. However, notwithstanding this, as a consequence of the tax cuts, it would be expected, at the margin, increased incentives to participate in the workforce, increased incentives to work longer, and increased incentives for skilled labour to stay in or relocate to New Zealand. Therefore these changes may have a flow-on impact on the productivity and growth of the economy through their impact on the labour market
The precise nature of the response to personal tax cuts is difficult to predict. For example, the effect could be smaller if the weaker economic environment encourages households to save more of the tax cuts than has been assumed.
R&D Tax Credits
Given the concerns about the effectiveness of the R&D tax credit it was considered that there were minimal effects in repealing it, although due to its relatively new introduction there is insufficient data to quantify any marginal effects. The government considers that there are greater growth benefits from personal tax cuts and therefore that it is preferable to repeal the R&D tax credit and apply the savings towards that end. Further, to the extent that the repeal of the tax credit reduces recharacterisation of expenditure (and the associated costs in doing so), there will be positive flow-on effects for growth. It is not possible to quantify these aggregate benefits due to data limitations.
KiwiSaver
Given that current KiwiSaver policy settings are considered very generous in the areas currently being modified, it is considered that the removal/scaling back of these features will have minimal impact on household savings levels. Again, there is insufficient data available to quantify this impact. The key macroeconomic effects in respect of the KiwiSaver scheme are reflected in the growth benefits from personal tax reductions. However, a reduction in the minimum contribution rates may result in many KiwiSaver accounts with small balances. This could have a negative impact on overheads and fees.
