By Bernard Hickey
Back in May last year when the government announced the biggest tax reforms since the mid 1980s there was plenty of hope in the air.
The theory looked good.
Cutting the top income tax rate from 39% to 33% seemed to kill three birds with one stone.
Firstly, it encouraged those on middle incomes to strive for higher incomes in the knowledge they would keep more of it. Secondly, it removed the gap between the top income tax rate and the family trust rate to close down a big loophole created by Labour when the higher top tax rate was introduced a decade ago. Thirdly, those on higher incomes could afford to save their extra disposable income, which would in turn boost New Zealand's savings rate and give our capital markets a fresh kick start.
The increase in the GST rate was designed to help pay for the income tax cut and to discourage consumption, therefore encouraging saving.
The changes to the rules on claiming depreciation of buildings for tax purposes and the removal of Loss Attributing Qualifying Companies (LAQCs) as a vehicle for rental property investors were supposed to reduce the size of the tax subsidy for property investing and take some of the heat out of the overvalued property market. It was also supposed to force investors to look at options other than rental property.
The company tax cut meanwhile was supposed to encourage companies to invest here and employ more people. The combination of all these things was supposed to deliver a long term boost to economic growth, employment, savings and investment. All these would bring down the budget deficit and transform the economy from a consuming and borrowing junkie into an investing and exporting powerhouse.
That was the theory and it all seemed so promising at the time.
But what has actually happened since October? Earlier this week the second part of the tax package took effect, so it's worth doing a progress report on how the package is working.
Simply put, it's not working.
The shock of the GST increase, on top of rising food and petrol prices, has forced New Zealand consumers deeper into their spending shells. The GST increase has obviously hurt a swathe of society that could least afford, many of whom are in the middle. Companies are shedding staff and the predicted surge in investment is hesitant at best. Government tax receipts from the GST increase are well below forecasts because of the slump in spending growth after the October Bill Shock.
The benefits of the tax cuts for those on higher salaries has not been saved and invested in job-creating export industries. Instead, it is being geared up with yet more foreign-supplied mortgage debt to pump up the prices of luxury property.
Figures out this week from Barfoot and Thompson for property sales in Auckland showed higher salary earners are snapping up the more expensive properties after visiting their increasingly friendly banker for an even bigger mortgage. Sales of property worth more than NZ$800,000 rose almost 40% in March from a year ago, while lower priced property sales barely rose. Prices in the swanky central suburbs of Epsom, Mt Eden, Remuera and Herne Bay are surging. North Shore properties are also selling fast. Meanwhile, properties on the fringes, down in South Auckland and out West are stuck in neutral. It is the same in New Zealand's provincial towns and cities. Prices and volumes away from central Auckland and Wellington are flat to falling.
Meanwhile the government's deficit is blowing out to unprecedented levels, in part because of the drop in income tax receipts and weak GST returns. Company profits are also weak and are set to be even weaker after the corporate tax cut kicked in from April 1. ANZ forecast this week the government is likely to borrow as much as NZ$20 billion this year or around NZ$4,500 per person.
Our current account deficit is also set to worsen as foreign owned companies repatriate yet more New Zealand generated profit, thanks to the tax cut, and as government debt held offshore rises, increasing interest payments.
The New Zealand dollar, meanwhile, has surged back above pre-quake levels, making it even more difficult for the economy to transform into an exporting powerhouse.
The government would point out it's too early to judge the tax package and also point to the effect of the Christchurch quake on the economy.
But the early signs aren't good.
It's worth asking again: what was it all for?
We have a higher budget deficit, higher debt, weaker growth, a weaker current account deficit and higher unemployment. But a certain section of New Zealand is now much richer in both income and wealth through a tax cut and higher property prices.