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(Photo: Dean Purcell/Getty Images)
(Photo: Dean Purcell/Getty Images)

OPINIONBusinessMay 13, 2020

With the economy in crisis, those living in poverty are set to miss out. Again

(Photo: Dean Purcell/Getty Images)
(Photo: Dean Purcell/Getty Images)

Budget 2020: With the unemployment rate growing and predicted to rise further, many more people face financial hardship and poverty. Alan Johnson explores how the government could address this in Thursday’s budget.

In previous budgets the finance minister Grant Robinson proved himself a fiscal conservative, suggesting that it wasn’t time to fully address our various social deficits and that we should save our surplus for a rainy day. Well in fiscal terms it’s a deluge now and his caution has proved prescient. 

Through the Covid-19 shutdown we have perhaps been lulled into a false new reality where the benefits of having more time at home became apparent. We have had an outbreak of utopianism with many speculating that we will see a major reset in our values and that we should use the occasion of the massive public spending on the recovery to revise our social and economic policy priorities.

However the uncertainty and immediate cost of the Covid-19 recession and the real threat of a second outbreak means that the government has little time to think about structural change – if indeed it was ever inclined to. Rather, the government’s priorities will need to be on the short-term and we will most likely see this in this week’s budget.

The budget may well focus on keeping SMEs afloat given how badly they have suffered and that they provide the majority of private sector jobs in the New Zealand economy. This assistance as well as capital spending on the so-called shovel ready projects will attract most of the extra money being thrown into the 2020 budget. 

Housing will feature prominently in the budget, as it should. After all, we do have a massive shortage of social housing and any possible downturn in private sector building can be picked up through public investment in decent affordable housing. The gearing up of Kāinga Ora as a development agency provides the state with a capacity to do this for the first time in over 35 years.

However, it seems unlikely that the 2020 budget will put much of a dent in child poverty. Child Poverty Action Group estimates that the number of children living in relative poverty could climb 25% to around 350,000 by the end of the year. This estimate is based on an assumption that only 50,000 jobs will be lost in the recession and that the unemployment rate reaches 6.5% – about the same as in the GFC. Things could be much worse given that numbers of adults receiving the jobseeker support rose by 36,000 in April alone. 

The main answer to reducing child poverty is to give more money to poor children’s families. The Welfare Expert Advisory Group in 2018 recommended increasing core benefits by 13% to 50% in order to ensure that beneficiaries have adequate incomes. This would cost around $1.3b annually.  The $25 per week benefit increase announced just prior to the lockdown is a move in the right direction but is only about quarter of what is required.

Given the massive legacy of debt we now face and the prospect of more spending to sustain businesses and jobs, it seems a distant hope that the government, in the 2020 budget, will find an extra $1b for poverty relief. Perhaps if such priorities were considered necessities in better times the glaring social deficits which now seem irresolvable may not have still existed.

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(Photo: Getty Images)
(Photo: Getty Images)

OPINIONBusinessMay 12, 2020

Budget 2020: Can we expect any radical tax proposals?

(Photo: Getty Images)
(Photo: Getty Images)

Expected to be the most significant in a generation, Thursday’s budget will reveal how the government will offset the monstrous cost of Covid-19. Terry Baucher explores the likelihood of tax changes.

As usual, the finance minister is not lacking for advice in the run-up to this week’s budget. It ought to be something of a once-in-a-generation blockbuster, but will we see any radical tax proposals? Given this is an election year I suspect not. But what tax measures could be announced on Thursday?

One economist has suggested a GST holiday, while the National Party has proposed a GST rebate based on the GST paid in the six months to January 1, 2020. Neither move is likely. In their Covid-19 response advice released to the government on Friday, Inland Revenue and the Treasury “strongly recommend that these sort of measures are not implemented”. They said such steps would “provide more benefit to unaffected taxpayers and no benefit to exporters or taxpayers getting refunds”.

So, no big GST move then. Besides, as the economy rebounds, the government will be very appreciative of the increased GST take. GST is expected to raise $23 billion or 26% of all tax revenue for the year ending June 30.

What about income tax cuts? In a normal election-year budget we’d probably see something, particularly since income tax thresholds have not been adjusted for more than 10 years. But these are not normal times. The government is undoubtedly loath to give away revenue it will need over the next 12-18 months. Furthermore, the “fiscal drag” effect of not raising tax thresholds in line with inflation is worth about $400 million annually.

Business has already received a boost in the form of the reintroduction of depreciation for commercial and industrial buildings and the increase in the low-value asset write-off threshold to $5,000. I understand these were measures already under consideration before the pandemic arrived.

I doubt whether any other business-related measure will be announced. Inland Revenue policy officials have been under enormous pressure formulating urgent responses such as the tax loss carry-back scheme. However, do expect Inland Revenue to be given additional resources to help it manage the small business cashflow scheme and increase its scrutiny of the hidden economy as well as other areas of suspected non-compliance.

If an across-the-board increase to income tax thresholds is off the table, what other options are available to help individuals? 

There are a number of incremental measures that would be particularly helpful for lower-income families and earners. For example, once the annual income of a family receiving working for families tax credits exceeds $42,500, then the amount of the credits is abated (reduced) by 25c per dollar of the excess. This abatement applies in addition to the 17.5% income tax rate applicable to income at that level, meaning such families have an effective marginal tax rate of 42.5% on every extra dollar of income.

Increasing the threshold at which abatement begins, perhaps combined with a reduction in the abatement rate, would benefit more than 350,000 families. Additionally, reducing the effective marginal tax rates for those receiving social assistance would meet one of the recommendations of the Welfare Expert Advisory Group. It would also start smoothing the way towards a universal basic income.

Similarly, there are more than 700,000 student loan borrowers who must contribute 12% of their income over $385 per week in repayments. Again, increasing the threshold at which repayments start and/or reducing the repayment rate would be helpful. 

If the finance minister does want to introduce tax measures to encourage the move to a low-emissions, greener economy, one option would be to increase fringe benefit tax for high-emission vehicles. FBT in the United Kingdom is determined by the level of the vehicle’s emissions. Such a move here would be a blow to owners of the ubiquitous twin-cab ute. Another alternative might be to remove FBT on the use of public transport, something the Tax Working Group suggested be reviewed.

These are all incremental measures which are useful in themselves but do not amount to a radical reshaping such as a wealth tax. The populist appeal of a digital services tax makes it the likely surprise move. The politics of the forthcoming election circumscribe bold tax moves by Grant Robertson, but we live in interesting times, so who knows? Everything is now utterly changed.

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