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Bill English has signalled that Treasury’s forecasts for extra tax revenues from potential property taxation changes in the May 20 Budget are lower than the NZ$1.3 billion estimated by the Tax Working Group and that any tax cuts are therefore likely to be smaller than some might have expected.

English made the comments in Wellington yesterday while announcing the creation of the Productivity Commission. Here’s what Radio Live reported:

The Government could have to back track on personal tax cuts after revelations it won’t be getting enough revenue to cover them. The money was to come from a hike on the tax on investment property as well as a rise in GST.

Last year’s Tax Working Group said up to $1.3 billion could be raised by better targeting investment property. But Finance Minister Bill English says Treasury’s estimates of that are now falling, and although that means there’s less money for tax cuts, he’s playing down the changes.

Here’s how Radio NZ reported the dampening of expectations:

Finance Minister Bill English says Treasury has a different view from the Tax Working Group on how much extra tax will be generated by changes to the way property is taxed. Mr English says that means the trade-offs between tax changes and cuts to income tax rates will be tighter.

My view

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Finance Minister Bill English and Regulatory Reform Minister Rodney Hide have announced the creation of a Productivity Commission early next year to help boost New Zealand’s economic performance across the public and private sectors. The creation of the commission was part of the National-ACT confidence and supply agreement signed after the 2008 election.

“It is essential that we increase our economic growth if we are to create the jobs, higher incomes and opportunities New Zealand families deserve. Our main challenge is to ensure this growth is based on private sector investment and exports, rather than the unsustainable increases in government spending and borrowing of the past decade,” English said.

“This will require action across the board – and it’s why the Government will give the Commission wide scope in terms of the issues it directs it to consider,” Hide said.

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By Olly Newland

NZ Prime Minister John Key made a fundamental blunder when he recently delivered to Parliament his views – the government’s views – of the proposals from the Tax Working Group.

Quite rightly he booted out the looney leftist ideas of land tax and capital gains tax (typical notions that arise from those whose lives are filled with envy whenever they see people other than themselves doing well).

However he caved in on one recommendation and gave a clear signal that the treatment of depreciation on investment property would be attacked in the Ministers of Finance’s Budget due out in May.

What the new measures would be was not made clear. No details were given, so the public has been left guessing about the imminent new measures.

Neither, it seems, has anyone considered what the flow-on effects may be and what unintended consequences may eventuate.

Even more disappointingly, by innuendo the Prime Minister appeared to go along with the suggestion that property investors act as some kind of free-loading extortionists ripping of the system while swimming up to their armpits in ill-gotten gains.

It appears that he chose to be ‘the populist’ – swayed by the ignorant masses who bay for blood, revel in public hangings, while cutting everyone down to size at the first opportunity.

The government as a whole has stumbled badly this time, which is hard to understand given that the Prime Minister and the Minister of Finance, Bill English, both have a good background in finance. Surely their collective wisdom would have taught them one thing:

Uncertainty creates unease and unease creates distortions.

Initially I believed that the proposed changes to depreciation would do little harm. On further research and discussions with others, the ramifications and problems became clear and I am now of the opinion that any major changes would indeed be harmful.

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Finance Minister Bill English has announced that New Zealand’s government guarantee for wholesale bond issues by banks will end on April 30, following the end of a similar Australian guarantee from March 31.

The guarantee was used by New Zealand’s banks to issue NZ$10.3 billion worth of bonds under 24 guarantee certificates. There have been no payouts and the guarantee fees earned the government NZ$290 million in fees, English said.

The guarantee was set up in November 2008 in the middle of the financial crisis after Australia’s government set up a similar scheme.

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Finance Minister Bill English has said Treasury had advised him in the last couple of days that New Zealand’s net foreign debt was expected to rise within the next 4 years to around NZ$240 billion from around NZ$170 billion currently. (Update 1 includes details from subsequent news conference on debt risks and the leaky building issue)

New Zealand’s net debt, most of which is private rather than public debt, stood at NZ$173 billion or 93.7% of GDP (total NZ$185 billion) at the end of the September quarter of 2009, Statistics NZ data shows. Nominal GDP growth of 5% would generate total GDP of NZ$224 billion within 4 years, which implies New Zealand’s net foreign debt would rise to over 110% of GDP by then, which for most developed countries would be considered unsustainable.

English told the Trans Tasman Business Council this would constrain New Zealand’s ability to grow and consume in coming years.

“A big portion of our growth will be consumed in servicing that debt,” he said.

English later told a news conference that New Zealand needed to lift its economic growth to be able to handle this increase in its net foreign debt. He said the government’s changes to the tax system and other settings for the economy were designed to lift economic growth over the longer term.

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Finance Minister Bill English has unveiled a National Infrastructure Plan that has identified the need for a second Auckland harbour crossing within the next 10 to 20 years. It did not detail immediately what form the crossing would take (either a bridge or tunnel) or how much it would cost.

“The existing Auckland Harbour Bridge is being strengthened to ensure it remains a strong, safe and viable link long into the future. However, building an additional harbour crossing is an important priority as the city grows, and it is a key component of the government’s infrastructure plans for Auckland,” the Plan said.

English said the first National Infrastructure Plan covered a 20 year horizon and had identified NZ$6 billion in government spending a year on physical assets, and that the government held NZ$110 billion worth of infrastructure assets. The plan provided a snapshot of public and private infrastructure, planned investment and the government’s priorities.

“It gives infrastructure providers greater certainty about the Government’s plans and ensures that planners and stakeholders have a clear sense of what is happening across a range of sectors,” English said in a speech to the Trans Tasman Business Council.

I am reporting from this speech and will update with more details through the afternoon below.

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