Friday, October 03, 2008

Tax cuts

National's quandry on tax is complicated by the financial crisis. Global demand is likely to soften in the short-term which will impact NZ just like every other country. Cutting personal and/or corporate tax can't offset this and so even if National gets some political advantage going into the election, it still faces the prospect that GDP may weaken over the next three years. That's not their fault, but it's unclear what they will do about it.

I've been impressed by the commentary of the New Zealand Institute. Compared with the Business Roundtable, Skilling's team are unencumbered by past battles and less ideological. Several publications point out that New Zealand's low trade intensity and foreign direct investment are significant constraints on economic growth - Key might have thought his infrastructure plans might improve FDI but that may be less likely now.

A tax cut doesn't lift productivity. A corporate rate cut may improve profits and encourage investors, but by itself, it has only a one-off benefit. National's cure-all tax cuts may realise an electoral advantage later this year, but it is an inadequate response that, alone, is unlikely to realise sustainable productivity improvements. I don't doubt they know this, but they've backed themselves into a corner and must deliver even if it ends up crowding out other options.

4 comments:

Anonymous said...

I don't think the Nats have ever claimed that the tax cuts are a cure-all. Whenever I've seen him speak, English has been very clear that they are but one part of a broader programme.

Tax cuts don't necessarily improve productivity, but they can help realign incentives towards the productive sector, which is positive.

And if tax cuts are so inadequate, why did Labour sign up to them?

paul.williams said...

I've heard/seen so little specific policy from National that I think it's a reasonable to observe how limited the approach appears. I know they want to amend the RMA but there's little detail. I know they're keen on infrastructure investment but similarly have not released much detail.

I'd characterise Labour's approach as overly cautious on tax cuts but Cullen's goal was clearly to first create systemic incentives for savings - NZ are poor savers and the current account balance is worrisome.

But they have heavily invested in workforce development, opened new markets and made progress on ICT infrastructure. There's is, at the very least, a more comprehensive approach even if you disagree with it.

Anonymous said...

Have a look at NZIER's work on savings and the current account deficit. Higher savings will not necessarily solve the CAD. And anyhow, Kiwisaver does not necessarily create much in the way of new savers. Look at NZIER and Waikato Uni's work.

Progress on ICT infrastructure? Where? Opened new markets - sure, but trade has historically been bipartisan.

And where are LAbour's policies, eh?

backin15 said...

All fair points - I've not yet looked at the NZEIR research but will. Kiwisaver's a critical device for cultural change however; extending the base of savers to most earners. I'll be interested to see if the research looks only at the first stages of implementation.

Incidentally, by ICT infrastructural development, I was specifically thinking about the local loop unbundling etc.