Tax cuts or not?

Tax cuts have been ruled out from this year’s budget (due later this month).

But there are mixed messages being given on whether their might be election bribe tax cuts in next year’s budget.

A pre-budget speech by Finance Minister Bill English last week was interpreted as ruling out tax cuts in the 2016 and 2017 budgets.

Spending pressures have also changed as a result of higher-than-expected population growth, and further opportunities to invest in better public services

As a result, the new spending allowances for Budget 2016 and Budget 2017 have been rearranged.

With the revised allowances, a portion of spending previously earmarked for Budget 2017 has been brought forward into Budget 2016 in recognition of the additional spending pressures.

Another portion of spending previously earmarked for Budget 2017 has been used to reduce government debt, to help reach the 2020 debt target.

This was seen as putting a priority on reducing debt.

Lowering income taxes remains a Government priority.  In particular we want to address the higher marginal tax rates faced by low and middle income earners as their incomes continue to rise.

However, as we’ve always said, tax reductions remain dependent on fiscal and economic conditions.

With continuing tight fiscal conditions, we don’t currently have an explicit provision for tax reduction in the fiscal forecasts

At this point, we’ve prioritised additional debt repayment over setting aside money in Budget 2017 for tax cuts.

And this was seen as a fairly clear signal that debt reduction was on the table for the next two budgets and tax cuts were out of the equation. However…

… we are still committed to cutting personal taxes over time, and will consider these – either in Budget 2017 or after – as and when the fiscal situation improves.

But yesterday John Key had a quite different message in his post-cabinet media conference.

Key looks to 2017 and beyond for tax cuts

Prime Minister John Key used his post-cabinet media conference to indicate he was looking at reducing personal tax levels in next year’s budget or he would campaign for a fourth term on a platform of tax cuts.

Key said that record low-interest rates and wages rising faster than inflation had limited demand for tax cuts, but that pressure from the public would grow.

“New Zealanders will say as the average wage rises to nearer the top personal rate, that it’s unacceptable that you’re on the average wage and paying the top personal rate. So there’s going to have to be movement”.

But it seems to be uncertain. Earlier in the day…

…Key indicated that $3 billion would be needed for a significant cut in personal taxes.

But at today’s media conference, he clarified that, saying a $3 billion Budget surplus would not be needed in order for the government to act.

I think it’s very unlikely there will be tax cuts in this month’s budget, but it’s impossible to tell from these mixed messages what will happen next year, when fiscal conditions and no doubt election prospects will be taken into account.

In the meantime effective personal tax rates continue to creep upwards as wage inflation puts new earnings into higher tax brackets.

It was annoyance at this bracket creep that put pressure on  Michael Cullen to give a bit back, and probably played a part in Labour losing the 2008 election, when Cullen finally tweaked the brackets  it was seen as too little  too late.

Inflation adjustment of the thresholds would technically not be a tax cut, it would be prevention of an increase.

I think tax thresholds should be inflation adjusted every budget, or else inaction should be seen as an effective (and deliberate) tax increase.

Key and English will have made up their mind about this year’s budget, it will be signed off and may have been printed.

But they should at least address bracket creep next year. They could start by not being vague and indecisive about whathe 2017 budget.

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