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Saving in New Zealand - Issues and Options

Definitions

Base broadening: Options to widen the tax base through the inclusion of currently untaxed income or assets; the removal of existing exemptions.

Broad-base, low rate: An approach to tax policy that involves ensuring that the tax base is as wide and comprehensive as possible, and applying low tax rates to the base. The wide tax base increases revenue gained at lower rates, and reduces distortions caused by different items being taxed at different/exempt rates.

Capital gains tax: Extending the income tax rules to tax income derived from increases in the value of assets (or to allow losses to be offset against other taxable income). Capital gains taxes can apply to a range of assets including real property and shares, and can apply on an accrual basis or on the sale of the asset (realisation basis).

Capital market: A market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds.

Consumer Price Index: Statistics New Zealand's official index to measure the rate of change in the prices of goods and services bought by households.

Consumption: Income that is not saved.

Core Crown: Consists of the Crown, departments, Offices of Parliament, the Reserve Bank, and the NZS Fund.

Current account: The current account includes all the transactions (other than those in financial items) that involve economic values and occur between New Zealand and the rest of the world. The major classifications are:

  • Goods and services
  • Income
  • Current transfers.

Dual income tax system: A tax system that taxes capital income at a low flat rate and labour income at high progressive rates. Mechanical rules separate labour and capital income.

Effective tax rate: Tax paid as a percentage of pre-tax income.

EET (Exempt-exempt-tax): A method of taxing savings income whereby tax is not levied on income that is saved (an alternative approach is to allow a deduction for income saved); no tax on interest or other savings income earned; distributed savings are taxed at marginal income tax rates.

Fiscal Strategy: Fiscal policy is one tool a government has to achieve its economic and social objectives. In New Zealand, the operation of fiscal policy is governed by the Public Finance Act 1989 (PFA), which requires the government to outline its fiscal policy intentions in the annual Fiscal Strategy Report (FSR). This fiscal strategy is undertaken through the setting of long-term fiscal objectives relating to expenses, revenue, the operating balance, debt and net worth over a period of at least 10 years.

The current Government's fiscal strategy - set out in the FSR 2010 - aims to deliver a fiscal position that is sustainable in the long term, contributes to economic stability and advances key priority policies.

General Government: Central, state (where applicable) and local government sub-sectors.

Gross Domestic Product: A measure of the value of all goods and services produced in New Zealand; changes in GDP measure growth or contraction in economic activity or output. Real GDP is measured as the value of goods and services excluding the effects of price changes over time.

Gross National Product: GDP less primary incomes payable to non- resident units plus primary incomes receivable from non-resident units.

Gross National Saving: The sum of government, business and household saving, excluding capital gains.

Household Debt: Debt incurred by households including: personal loans, credit sales, hire purchase, credit cards, long-term leases, mortgages and housing buy-back schemes.

Inflation Indexation: Indexing the tax base to adjust for the impact of inflation. Indexation would most likely apply to inventories, depreciation allowances, available subscribed capital, and interest deductions and income.

Investment: The amount of goods purchased, not for consumption but to be used for future production. It can also reflect the amount of funds used to purchase financial assets.

Labour productivity: Measures output per input of labour (where labour inputs might be measured as hours worked or people).

Modified Dual income tax system: This term is used in this report to refer to a dual income tax system where capital income is taxed at a capped rate and labour income is taxed at progressive rates. The capped tax rate for capital income means that a taxpayer facing a lower marginal rate for their labour income would pay that lower rate on their capital income; whereas those facing a higher labour tax rate would pay the capped tax rate on their capital income.

Monetary policy: The Reserve Bank implements its monetary policy decisions by adjusting its official cash rate (OCR) in an effort to maintain stability in the general level of prices within a defined annual CPI target range. Tightening monetary policy means raising the level of the OCR in order to moderate aggregate demand pressures and to reduce inflationary pressures, while easing monetary policy has the reverse effect.

National accounts: Also known as System of National Accounts (SNA), a comprehensive, consistent and flexible set of macroeconomic accounts to meet the needs of government and private sector analysts, policy makers, and decision takers.

Net Core Crown debt: All debt issued by the core Crown less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and are made for public policy reasons rather than for the purposes associated with government financing.

Net foreign asset position: Also referred to as the net international investment position (NIIP), this measures the stock of New Zealand’s external assets minus the stock of New Zealand’s external liabilities.

Net national saving: Gross national saving less depreciation of fixed capital.

Portfolio investment entity (PIE) regime: PIEs are collective investment vehicles for passive investments. PIEs must have a minimum of 20 investors, with no more than a 20% interest in the PIE. PIEs can invest in equity (with some restrictions), debt, other PIEs, or real property. They can also be listed on the stock exchange. Investments in PIEs are effectively taxed either at the individual's marginal tax rate, or at the 28% capped rate.

Productivity: The amount of output (eg, GDP) per unit of input.

Real effective tax rate: Tax paid as a percentage of real pre-tax income (pre-tax income adjusted for inflation).

Saving (flow): Disposable income less final consumption expenditure. Saving can be calculated for each institutional sector or for the whole economy.

Structural fiscal balance: An estimate of the fiscal balance (eg, operating balance before gains and losses) adjusted for short-term fluctuations of actual GDP around trend GDP. The estimate provides a picture of the underlying trend fiscal position. Because it is based on a number of assumptions and is sensitive to new information, the estimate is subject to some uncertainty.

Trade Balance: The trade balance is the difference between exports and imports of goods and services.

TTE (Tax-tax exempt): A method of taxing savings income whereby tax applies to income before it is saved; interest or other savings income is taxed at marginal rates; distributed savings are not taxed.

Total Crown: The reporting entity as specified in Part III of the Public Finance Act 1989, and includes the core Crown, state-owned enterprises and Crown entities.

Tradeables/non-tradeables: The tradeable sector is the part of the economy particularly exposed to foreign competition. It includes primary, manufacturing and tourism industries. Non-tradeable output is estimated as a residual with total real GDP.

Transfer payments: Welfare benefits (eg, unemployment, invalids, sickness, domestic purposes benefit) and other assistance (eg, accommodation).

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