2004-12-10 20:01:08 UTC
give priority to tax relief for low and middle income working families, with
gradual tax reductions for those earning higher incomes as fiscal
I also said the next National Government intended to reduce the tax rate on
businesses to at least match the Australian rate of 30%.
Over recent days, I have been signalling my intention to draw clear
battle-lines between the two major parties on taxation as we move closer to
the next general election.
The Minister of Finance has responded with increasingly strident assertions
that there is no room for reductions in taxation. You may note that he stops
short of absolutely ruling out tax cuts. And Helen Clark has nothing to say
on all this.
As Labour has demonstrated on numerous occasions this year, if threatened
politically, there is no part of the National Party's programme that it will
But by now I think most New Zealanders understand that Helen Clark and her
Government are philosophically opposed to lower taxes.
I hope that I have no need to reassure you that I am very much in favour of
And today I want to remind you why.
Many of you will have heard me lament the growing gap in average incomes
between New Zealand and Australian workers. Many of you will have heard me
assert the need for a long-term plan to lift New Zealand incomes back into
the top half of industrialised nations - an objective which was shared by
the current Government until it was placed in the too-hard basket about two
If we are to do better as a nation, if we are to improve our performance, we
will need a change in culture.
A big change in culture.
If we are to improve our performance, we will need to create a culture of
enterprise, of skill, and of hard work.
And to achieve that, we must get the incentives right.
We must have a tax system which rewards enterprise, rewards skill and
rewards hard work.
Yet today we have a tax system that punishes all these things.
I am utterly opposed to the direction that Labour is taking us. Through the
combined effect of the tax and benefit systems, most working families will
receive much the same net income, regardless of how hard they work,
regardless of what responsibilities and promotion they accept, regardless of
their own efforts to better themselves.
That is a charter for the idle, and a recipe for a low productivity, low
The tax system punishes positive attitudes, while the welfare system
encourages a set of attitudes which are utterly destructive of self-reliance
and self confidence.
These are terrible signals to send to the next generation of New Zealanders.
And it need not be like this.
If we slowly but consistently work to reduce taxes over time, large benefits
will emerge for all of us.
And so I am putting taxation policy firmly on the agenda for next year's
election campaign. I am not, today, going to release the details of the tax
policy we will take into the next election.
But I can tell you about the general shape of the concerns that we will
seek, over time, to address. And I can give you a sense of what will be at
stake in the next election.
The updated government accounts make it clear that there is room for the
government which is elected next year to deliver a tax cut for every working
New Zealander in its first Budget.
No thanks to the present Government, the economy has remained very buoyant
over the past few years: international commodity prices have been firm,
there has been a strong inflow of people seeking to get as far away from
international tensions as possible, and international interest rates have
been at a level which has produced a strong rise in property prices.
As a consequence of that buoyancy, and of the increased taxes imposed by the
current Government, the surplus in the government accounts was $6.6 billion
last year, and is headed for close to $6 billion next year - and that
despite huge increases in government spending in recent years.
The very comfortable fiscal circumstances which we enjoy provide a backdrop
for an important election-year debate about the incentives New Zealanders
face, and give the prospect of real choices as we elect a government for the
next three years.
I want to stress that National's decision to retain the New Zealand
Superannuation Fund, announced last week, has no effect on what we will do.
We never had any intention of trading off contributions to the Fund against
tax cuts. The issue was always whether to pay off government debt or build a
Fund. Both required us to run a fiscal surplus.
But the current fiscal position provides the capacity to deliver tax relief
and much improved incentives for every family, and every working New
Zealander, while continuing to contribute to the Super Fund.
It is easy to get too close to these issues: too bound up in the details of
the size of the fiscal surplus, too wedded to particular habits of political
rhetoric about spending priorities versus tax relief.
So let's just step back a moment and try to register the enormity of what is
happening to the earnings of working New Zealanders.
In the year ending June 1999, tax revenues were $30 billion.
Last year, tax revenues spiralled out to $42 billion.
Since 1999, the government has taken in an additional $34 billion in revenue
above what it would have received had revenue stayed at the 1999 level. $34
This Government has had 5 years and a $34 billion increase in revenues.
Those revenues are still growing fast.
And yet none of that massive flood of revenue has been returned to the very
people who go out to work each day and earn that money.
Not one bit.
The Finance Minister was asked in Parliament recently to list the taxes he
has increased. He said there were six significant increases. In total, in
fact, there have been 30 increases, although some were quite minor. He's
certainly increased income tax rates, petrol tax, and taxes on cigarettes
But asked to list the ones he has reduced, he was stumped. He couldn't think
of any. My Finance spokesman, John Key, helped him out by reminding him that
he had introduced a preferential tax rate on Maori authorities, reducing the
rate from 33% to 19.5%.
None of these tax increases had anything to do with a need for more revenue.
For this Government, it seems those revenues have developed a glittering
The reality now is this: you earn it; we will spend it for you.
So there we have it: massive revenues, a huge surplus - and not a thought of
easing the enormous pressure on many of those who actually earn the money.
What this means for working New Zealanders
I want to focus now on some of the personal situations we are talking about,
because they reveal the damage our tax system inflicts on the incentives
people face, and the opportunities they have to get ahead in life.
Think about the person who works for years to build up a business, takes
many risks, puts their own savings on the line, and endures very low incomes
in the hope that the business will come right - and there are nearly 250,000
small businesses in New Zealand.
And if that business does come right, and all those years of effort and risk
finally pay off?
Well, this Labour Government will be there to relieve you of the burden of
your success. They may have some more hip-hop tours to fund.
Or think about those people with volatile incomes - which is pretty much
every small business. Or every tradesperson. Or every professional rugby
player. Whenever these people get a good year, Helen Clark and Michael
Cullen will be at the door to take their cut.
But they don't turn up with a refund when the bad year comes; they are not
around when an all-too-brief professional sporting career is over.
Or think about another aspect of a typical life cycle. Think of a couple
bringing up a family, paying off the mortgage, and then perhaps in their
fifties finally being able to save for retirement. They will probably still
be providing support to children in some form of tertiary education. After a
lifetime of work, this couple will probably be near the peak of their
earning power; but after all those years of doing it right, bringing up a
family, paying off the mortgage, and saving for their retirement, their
reward is that in all likelihood they will be hit by a punitive tax rate.
And to compound the pain, the return on their savings, which is so crucial
as a supplement to their New Zealand Super, will be taxed at the top rate as
There is something deeply wrong here.
There is a very direct link between undisciplined government spending and
the financial pressure on households.
The reality is that our tax system is stopping people getting ahead,
stopping them paying off their debts, stopping them building an ownership
stake in society, stopping them building adequate savings for retirement.
There is a broader set of issues behind all this.
We are moving further and further away from a New Zealand that rewards
initiative, that celebrates hard work and achievement, and that applauds
It is all about incentives.
The Labour Party is schizophrenic about incentives.
They eased access to sickness and invalid benefits, and were surprised when
numbers increased sharply. Since 1999, the population has increased by just
6%. But the number of those on the sickness benefit has increased by an
enormous 33%, and those on the invalids' benefit by over 40%.
And yet they don't think incentives matter.
Except when it suits them.
Because Helen Clark has decided that incentives are important in other
areas: subsidies get handed out to carefully selected businesses, especially
when they provide photo opportunities for Cabinet ministers, and to
The same schizophrenia applies to the tax system: incentives seem to matter
when it comes to taxing cigarettes and alcohol, or fatty foods, or fossil
But when it comes to work, to saving, to investment and to risk-taking - in
other words to all the things that are crucial for economic growth and
rising personal incomes - the Government is in denial about the incentive
effects of taxation.
They talk about the ownership society, but Labour policies cut deeply into
the very things that give people the chance to build their own ownership
Our tax system deflects people from the habits and attitudes that encourage
Even more damaging, we are sending a terrible signal to the next generation
about what to do to get ahead in life.
And this is not just a matter of the tax system. It is reflected in our
welfare policies, and in our education system.
What is the message from an education system determined to make sure
everybody passes, in some degraded form?
What message are we sending our children if the option of a period, or even
an entire life, on welfare is so easy to adopt?
These issues point to the challenges facing the next National Government.
Working for Families: the 2004 Budget
Let me turn to the latest Budget. The message to working New Zealanders from
that Budget was that there would be no tax relief.
In my view, political pressures will in fact lead to some gesture of tax
reductions or bracket adjustments next year, but unless the National Party
is breathing down Labour's neck they will be small and begrudging - and, in
any case, far too late.
What the 2004 Budget envisaged was a reverse flow of benefit payments to
somewhat offset the punitive over-taxation of families. As a consequence,
middle-income families will gradually be shifted into beneficiary status.
This is the new world that Michael Cullen unveiled in the Budget this year,
with the 'Working for Families' package.
Under this greatly expanded welfare programme, your income, after taxes and
benefits, will increasingly be unrelated to what you earn. It will be
related instead to how many children you have, whether you are on one of the
various forms of benefit, and whether you are a target political
And in this world, what is the advantage to the person who puts in the extra
hours in overtime, who studies to get new skills and a higher earning
potential, who takes on extra responsibility?
The answer is that, after all this work, these people will see precious
little difference between their after-tax-and-benefit income and the income
of those who do not put the extra hours in, who do not invest in developing
skills, who do not take extra responsibility.
The last Budget amounted to a Labour Party lifestyle guide - take life easy,
don't work too hard, don't take any personal responsibility for yourself,
and there will be minimal sacrifice of income.
It is a set of policies that is taking New Zealand into a world riddled with
perverse incentives. It amounts to a declaration to nurses, junior doctors,
teachers, builders, plumbers, engineers, the skilled and the energetic, that
you will not get ahead in this country no matter how hard you work.
You doubt that? Let me give a simple example.
Suppose you are a principal income earner on $38,000 with a partner and
three young children, living in a central Auckland suburb, and eligible for
the accommodation supplement. You decide you want to get ahead faster and
get better clothes for the kids. You get a new qualification, work longer
hours, and take on more responsibility. Your salary eventually rises to
$70,000 a year, $32,000 more than before. But your after-tax-and-benefit
income rises not by $32,000 but by just $2,856, with the other $29,144 going
to the government. Your effective marginal tax rate is 91%. The abatement of
the accommodation supplement contributes significantly to this, but even
without that the government takes 66% of the increased earnings.
So why would anybody go to all the effort?
The same sort of situation affects those on benefits looking to get into
work, where many people will lose in excess of 80% of their extra earnings.
I am deeply opposed to policies which stifle the incentives that drive
personal responsibility and self-reliance.
Problems with our tax system
Let me summarise what is wrong with our tax system.
Simply, our tax rates are too high at all levels.
And the higher tax rates cut in at incomes that are far too low. In the
United States, the top tax rate cuts in at the equivalent of NZ$450,000, not
the $60,000 in New Zealand.
Our taxation of families is punitive, and the benefit system that tries to
offset that is making most middle-income earners dependent on the State,
when they should not have been taxed so heavily in the first place.
Our tax and benefit system destroys incentives to work; it penalises those
who work hard and try to get ahead.
Our tax system punishes success, while our welfare system rewards lack of
Our tax system punishes those who save, who try to build an ownership stake
Because of this our tax system is fundamentally unfair.
Instead of re-confirming shared kiwi values of self-reliance and enterprise,
we are building a culture of self esteem without achievement, of financial
rewards without hard work, of dependence on others instead of fostering a
At the next election New Zealand voters face a momentous decision.
We are reaching a fork in the road, and the decision will substantially
determine the sort of country we become, the sort of attitudes and
aspirations the next generation will adopt.
National's approach to tax policy
National's tax policy will ensure that the core kiwi values of independence
and self-reliance are encouraged.
That will be one of the key choices that voters will make at the next
election: a choice between a massive extension of welfare into middle-income
New Zealand, or a future that encourages and rewards enterprise and
With the biggest budget surplus in our history, there is scope for a tax cut
for all New Zealanders.
Clearly, the scale and initial focus of such cuts will depend on the state
of the economy at the time. We have no intention of triggering a lift in
interest rates with too rapid a cut in taxes. I, more than most people,
understand the connection between tax policy and interest rates!
But I part ways with the Finance Minister, who seems to have the strange
notion that if he spends your money it is not inflationary, but if you do it
A significant reduction in the tax burden will take many years and more than
one term of government. But if we slowly but consistently work to reduce
taxes over time, large benefits will emerge for all New Zealanders.
Reducing the tax burden is about improving the opportunities that this
country offers those with initiative, energy, ideas, and drive.
A National Government will ensure that the benefits of hard work and
investment are largely retained by those who do the work and take the risks.
I don't believe in a culture of envy; I believe in a culture of aspiration
And a culture like that, when harnessed to shared values of compassion for
those in need, and a determination to take care of the weak, the ill, and
those who have simply stumbled upon bad luck, produces a society that we can
all be proud of.
It will be a society that generates the incomes needed to keep our citizens
in this country, and which has the wealth to support those in need, to help
them back on their feet, and to care for the elderly.
That is demonstrably not the society we have at present.
But it is one we could have.
I want to conclude by saying something about the choices we have, and the
differing goals they would serve.
As I have said on many previous occasions, I place the highest priority on
reversing the hugely dangerous and growing gap in average incomes between
this country and Australia.
Nothing threatens the prospect of this country offering a future to our
children and our grandchildren more than a growing gulf in the standard of
living between New Zealand and Australia.
That set of numbers, which measures the still growing income gap, represents
a growing disparity in our ability to resource medical care, educational
opportunities, and most of the benefits of a civilised society.
We can close that gap.
To do so, we require taxation changes that provide greater incentives for
investment, enterprise, entrepreneurship and hard work. And those changes
will involve both personal tax and company tax.
Also needed are changes to our welfare system and improvements in the
quality of the education we provide.
Another important goal of our tax reforms will be to reinforce social
stability by lessening the burden on the hundreds of thousands of
middle-income families who, under the policies of the current Government,
are taxed as if they were the new rich.
That could mean targeted reductions in tax on families, leaving
significantly more of their own cash in their pockets - as distinct from the
middle-income welfare policies announced by Michael Cullen in this year's
Budget, which will churn tax from one pocket to the other, minus a bit to
pay for the bureaucracy.
It could also mean tax relief for those who reduce the burden on the state
by meeting the costs of their own medical care, or the costs of their
children's education. That could be achieved through either tax deductions
or rebates on such expenses.
It is not at all clear to me why some New Zealanders should be expected to
pay twice for their healthcare and for the education of their children -
once through their tax and once through health insurance premiums and school
That being said, National is committed to a broad-based, but lower-rate tax
structure - that is the structure most consistent with achieving a high
income and high-growth society. The more exemptions and deductions there
are, the less likely it is that we can move to a lower rate structure.
Clearly, we cannot immediately make huge steps in all of the directions I
have alluded to.
Equally clearly, there is plenty of room to take meaningful steps towards a
number of them - unless, of course, the Labour Government opts to bribe
voters with a vast splurge of additional government spending in next year's
Before the next election, I will outline in detail our plan to ease the tax
burden, to improve work incentives and enable people to get ahead in this
country. Our focus will be on what can be achieved over a number of years,
not just in year one.
We will not be sacrificing valuable public services in that goal, but we
will be holding the bureaucracy accountable for every dollar spent. We
believe in a strong and efficient public sector, and we will fund it
I believe governments should budget and spend taxpayers' money as carefully
as hardworking families have to do every week. That will be our benchmark
for reviewing spending programmes.
This Labour Government has had more than five years to provide some tax
relief but has done nothing.
Over a similar period, a National Government could radically transform the
incentives New Zealanders face, and the opportunities they have to get ahead
And we intend to do just that.