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Bernard Hickey delivers a special report in association with BNZ, including a look at 10 reasons why the government should not increase GST from 12.5% to 15%.

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The ASB Housing Confidence Survey for the three months to January has found the resurgence of housing confidence last year has abated slightly in 2010 as investors focused on the upcoming increase in the Reserve Bank’s Official Cash Rate and uncertainty over property taxes.

“Despite some reduction in the favourable tailwinds for property, house price expectations remained firm over the quarter,” ASB said. The survey found 50% of those surveyed believed now was a good time to buy property, down from 59% previously.

The survey found awareness about  the RBNZ’s  ”middle of the year” timing for a hike in the Official Cash Rate and uncertainty around tax policy changes was likely to weigh on the house market until details were announced in the May 20 Budget.

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By Bernard Hickey

Prime Minister John Key has announced in his opening speech to parliament that a land tax, a Capital Gains Tax and a tax on equity in residential property investments would not be considered in the May 2010 budget and had been ruled out by the Government. It was however looking at unspecified measures suggested by the Tax Working Group to tax property more to help pay for an unspecified reduction in the top personal tax rate.

(Updates with My view that Key exposed himself today as a timid follower, not a leader. Update 3 includes reaction link. Update 4 includes link to video of Key’s tax comments. Update 5 includes link to full speech)

Read the full speech here.

Watch on YouTube here.

“Some of the options discussed by the Tax Working Group are not favoured by the Government, for a variety of reasons, and will not be progressed,” Key said in speech notes prepared for the address and obtained under embargo by Interest.co.nz in Wellington.

“In particular, we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,” Key said.

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The Government has released its Half Year Economic and Fiscal Update showing a slight improvement in the economic outlook, which means the budget is expected to remain in deficit until 2016, rather than the 2018 forecast in May in the depths of the recession. (Update 1 includes ASB economist comment.)

Finance Minister Bill English said the budget and economic outlook was a little better, but there were risks the economy could deteriorate again and there was little room for slippage in the government’s tight approach to spending.

“This reflects the fact that the global economy has stabilised and the success of significant Government initiatives in the past year to fight the recession,” English said.

“However, that does not mean that all of the problems of the recession have passed – risks remain that growth could weaken again,” he said.

“Unemployment is forecast to peak sooner and lower than previously predicted – 7% in early 2010 as opposed to 8% in the second half of 2010. However, it is likely to remain at elevated levels throughout 2010, even as the economy improves. So the year ahead will remain difficult for many New Zealanders.”

The Government’s fiscal position remained challenging.

“Budget 2009 stopped the growth of low-value Government spending and provided a credible programme to contain debt. Even so, the forecast operating deficit for 2010/11 is NZ$6.7 billion and the Government’s accounts are not expected to return to surplus until 2016.”

“This is despite the forecasts assuming long-term spending restraint and an upwards creep in average tax rates caused by increasing numbers of taxpayers entering the top tax brackets. There is little room for slippage.”

Here is the full statement below from Bill English

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By Bernard Hickey

Here’s the quick version:

Out of the Tax Working Group’s recommendations due later this month, I think the government will look at equalising the top income tax rate with the corporate and trust rates at 30% in the 2010 budget. The NZ$1.6 billion cost of this could be paid for by one or two smallish taxes on rental property investors such as the denying depreciation on buildings, making depreciable buildings taxable on sale, denying the offsetting of rental losses against other income or imposing a Risk Free Return Method for taxing the inflation-adjusted equity in rental properties.

I’d like the government to equalise the income tax rates at 27%, increase GST to 15%, replace Working for Families with a NZ$2,000 per child semi-universal payment and impose a land tax, but that’s politically too hard before the 2011 election. I’d like the government to campaign before the 2011 election for a 25% equalised income tax rate, a 0.5% land tax with a NZ$50,000 per hectare threshold and an inflation adjusted, universal Guaranteed Minimum Income to replace all benefits, including New Zealand Superannuation.

Here’s the long version:

This week’s public conference hosted by the semi-official Tax Working Group produced plenty of insight into the thinking of the group as it prepares to make its recommendations to the government later this month. These recommendations will be much harder for the government to let through to the keeper than the 2025 Taskforce, which was simply written off as an ACT party manifesto in drag that could be ignored as too radical.

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Finance Minister Bill English has set the scene for a tough 2010 Budget by detailing “rampant” government spending growth over the last five years that is “unsustainable and cannot continue”. Government spending grew three times faster than the rest of the economy in the last five years, English said. (Update 2 includes video from Bill English)

“Baseline Budget spending has jumped 45% since 2005 – at a time when inflation and the economy only grew by about 15%,” English said a month out from the government’s Half Year Economic and Fiscal Update (HEFU).

“More than a third of all Budget vote areas received funding increases of over 50% in the past five years and over two thirds received increases of more than 30%,” English said.

English is right in the middle of setting budget targets for ministries and compiling the details of the 2010 budget due in May. He will have already seen the early drafts of the HEFU. The 2010 budget is the last before the election year budget of 2011.

Here is the full release from English below and a short video from English:

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