Author: Susan Edmunds

OPINION: The Government's $7.5 billion surplus is another blow to the patience of every New Zealander waiting for a tax cut.

The surplus is $2b higher than last year's and amounts to roughly $1500 for every New Zealander - although $2.6b was an on-paper change to the way Treasury treats KiwiRail.

Each time the Government reports its books are comfortably in the black, it's a little harder to argue that it needs all the money it's getting from New Zealanders.

Our tax thresholds and rates have not been adjusted since 2010, when the Government ran a $4.4b operating deficit.

Despite its healthy balance sheet, since the Government took office, it's reversed tax cuts that were planned by National, replacing them with a "winter energy payment" available only to beneficiaries. It hiked petrol tax last year and this year, and plans to do so again next year.

We can't ignore the fact that the money that makes up the surplus comes from somewhere - mostly New Zealanders' pay packets. With economic growth slowing, it's becoming increasingly important that the Government does what it can to put some of it back again.

Brad Olsen, an economist at Infometrics, said the need for fiscal stimulus was becoming more intense.

The Reserve Bank is doing its bit, and the official cash rate looks likely to fall further. But that only helps those of us with borrowing that's influenced by the OCR. In general, that's the better-off.

It isn't a question of affordability for the Government, it's an issue of priorities. It is forecasting future surpluses of $1.3b and $2.1b.

The Government reported debt of 19.2 per cent of its gross domestic product - compared to 106 per cent for the United States and about 40 per cent in Australia.

The Tax Working Group said in its final report that, if the Government wants to improve incomes for certain groups of low- to middle-income earners, such as people working full time on the minimum wage, cuts to marginal tax rates or increases in lower tax thresholds could be the answer.

It suggested there could be a tax-free threshold under which no income tax is payable. These are common in other parts of the world.

It makes no sense for the Government to sit on a pile of cash while New Zealanders are increasingly hunkering down and cutting spending to protect themselves amid reports of impending economic doom.

Offering a tax cut, even a targeted one to low-income families, would get money flowing through the economy in exactly the way the Government needs.

Tax expert Terry Baucher said the Government could also look at the threshold at which people are required to pay back their student loan, or other settings.

Finance Minister Grant Robertson reported debt at less than 20 per cent of GDP.

"Although the limits for beneficiaries and Working for Families abatement have been adjusted recently there's still scope to increase these further. All these are political decisions so it depends on which constituency holds most appeal - or to be frank, votes. I personally would prefer to see all thresholds inflation adjusted automatically, as happens with ACC, just to encourage more transparency about what is, or is not, a 'tax cut'."

Some economists say it doesn't even need to take the form of reduced tax rates.

Brad Olsen, an economist at Infometrics, said the need for fiscal stimulus was becoming more intense.

"Stimulus needs to be quick acting, targeted, and able to be turned on and off. Tax cuts are a bit too permanent for my liking. What I'd suggest as a better option is a tax rebate, which would work a bit like a temporary tax cut, with IRD returning tax back to those who'd already paid tax. A temporary tax rebate could only be for a year, or longer if needed, but doesn't cement in a lower tax rate. It's a way of injecting a bit of cash back into the economy during this period of softer growth.

"If anything, the importance of revving up private consumption, getting households to spend more, is even more pressing when the other way that fiscal stimulus normally come about is via infrastructure spending, but given the delay in many government projects, a boost for households is likely a better more to give the economy a shot in the arm sooner rather than later."

Note from Nighthawk.NZ:

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