Guy Trafford summarises the latest farmer confidence survey, sees belt tightening ahead. He also looks at the impact tax is having on disposable incomes and concludes it's time for some change

Guy Trafford summarises the latest farmer confidence survey, sees belt tightening ahead. He also looks at the impact tax is having on disposable incomes and concludes it's time for some change

Federated Farmers has published the results of its latest Farmer survey. On the back of the Brexit debacle and the China versus USA trade war, farmer confidence is falling.

Over 50% of survey respondents are expecting trade conditions to worsen over the next twelve months. This is a dramatic increase compared the same survey conducted six moths ago which had the same question having only just over 40% respondents answering this way so a 25% change really reflects a shift in farmers mood.

Perhaps surprisingly, farmers showing a profit reduced from 47% six months ago down to 44%. Over half of total respondents are dairy farmers and share-milkers, so dairy fortunes are going to more heavily weigh on the end results. However, somewhat contradicting the pessimistic outlook, the number of farmers who are predicting a rise in profitability increased by 11.4% from 4.1% in the previous survey - although the latest news of a zero dividend payout from Fonterra came after this survey.

The one area that held no surprises was around future concerns and 24% are concerned about climate change policy and another 19% are concerned about regulation and compliance costs, arguably two sides of the same coin. Perhaps because of the uncertainty around the future, more farmers are aiming to reduce debt in the coming twelve months. At least reductions in interest rates should help to allow this to happen.

Also in line with the desire to reduce debt there was an increase in the number of farmers aiming to reduce spending with those who intend to increase spending at 6.3% down from 18.2% in the last survey. If farmers can achieve these outcomes rural services and suppliers may also have to tighten their belts to ride out this period of uncertainty as it is one thing farmers don’t like, whether it is from weather, markets or politicians, is uncertainty and it is coming in spades at the moment.

A tax review

Successive governments have made much around the fact that they don’t increase taxes. Despite this, the average PAYE earners (and the self employed) are feeling that their buying power is diminishing.

I have had a bit of spare time to investigate the data and if this is how you feel you’re not wrong.

There is an economic term called “fiscal drag”. It refers to when you end up by paying more tax when your salary is increased with inflation and thereby can cross over into higher tax brackets (bracket creep) with the end result being that you can pay considerably more tax while still having the same purchasing power and the government doesn’t have to do a thing. Just by not adjusting the tax rates to account for this they achieve considerable ‘windfall’ gains.

The Reserve Bank has been the focus of, at least in part, stimulating the economy. The RB Act provides only a couple of fairly blunt tools around the supply of money. These are the “Official Cash Rate” which influences what banks charge us for loans (and pay for deposits) and they can make rules around banks behaviour, the lending ratios being the current one used to influence house prices. There are some other higher level controls but these are a bit more in the abstract realm.

Government has a major part to play also but manipulating the timing of major spending, these can range from additional welfare payments, to major infrastructure projects. Another tool which seems to be in the “hands off” category is altering tax rates. These change very infrequently, perhaps due to the administrative costs involved and more likely being locked into election promises. These work both ways; that is. increasing or decreasing taxes, and apply to both the current and previous governments.

Below is an assessment of the how all New Zealand taxpayers are being quietly ‘screwed’ when it comes to tax and if we wonder why retailers among others are seeing their customers spending less this has to be seen as part of the problem.

  • The last adjustments to the PAYE tax rates occurred in 2010, also that was when GST went from 12.5% to 15%. (Remember the good old days of 10%, some won’t). If our worker was grossing before tax say $70,000 back in 2010  they were on the cusp of moving from the 30% tax rate to the maximum 33%. (Starts at $70,001)
  • The tax on $70,000 was/is $14,020 The average rate of inflation (lets keep it simple) over this period was 1.6% so if the $70,000 moves up to $82,024 in 2020 through cost of living adjustments (although still having the same gross purchasing power as the $70,000 in 2010).
  • With the increased salary (nominal terms) our worker is now paying an additional 28% in tax of $17,994.
  • People on lower salaries get treated far worse because the jump from a $48,000 income to the next tax bracket ($48,001) goes from 17.5% to 30%.
  • This has the effect of the tax payer paying $7420 back in 2010 to $9897 in 2020 as the tax on $56,257 which is what the $48,000 is in 2020).
  • This is a 33% additional tax paid from a gross income that had no additional spending value so in both cases net income in real terms (purchasing value) has gone back substantially.

If we look at the net income and take them back to 2010 values we see how everybody (who is paying tax) spending value has decreased. In this case it has reduced by $1024

  • Adding insult to injury is the increase in the GST rate. If we take an extreme example and assume all of the net income after tax is spent on goods and services, then back before the GST increase on the net 2010 income was spending $41,980 on goods and services of which the GST component was $5,248 leaving a residual net income of $35,508
  • The same person in 2020 whose income is taken back to 2010 values and all net income is spent on goods and services has a residual income (2010 terms) of $33,622
  • Meaning they have spent an additional $1885 per year in tax for that year (an additional 15.1%) and this amount will only grow as years past.

In summary the fiscal drag was (only) $1024 but when adding on to the additional GST being paid since 2010 the amount of additional tax starts to look pretty heavy. Especially, when you consider there are over 3,644,000 taxpayers and I don’t know what the average tax payment is but you can see how much additional income is being achieved over 2010 levels. So, if the government is serious about stimulating the economy here is where they could start looking. Or if you are a bit more magnanimous given the additional tax we are paying why is the state of our public services in such a crappy state.

If you have got this far, well done. I tried to make it simple but… And I purposely didn’t go back beyond 2010 to the old rates which were more draconian than 2010 onwards but I imagine the lower GST then would have moderated it somewhat.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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And rates have risen at far above inflation too.

National had legislated for tax cuts in 2018 before the coalition came to power and cancelled them. If they win in 2020 they may not have the fiscal head room required to do so anymore given huge ramp up in spending by the Coalition.

"huge ramp up in spending" Nice populist talking point. Reality as seen by Rod Oram is the spending of this gummit is very conservative as compared to other Nations. He was talking up the point that with cheap money and a lot of head room, we can afford easily to do more infrastructure spending and the likes. This cd plug a hole in the gloomy global outlook.

Thanks Guy. Sort of. Bit depressing really isnt it.

All so true. And yes, to stimulate the economy the Government needs to raise the threshold of the lower tax bands and lower GST. Or perhaps go further: abolish GST, make the first $20,000 of income tax-free as in Australia and Britain, and implement all the recommendations of the Welfare Expert Advisory Group. Poor people struggling to afford necessities will spend every extra dollar and revive the economy, whereas the wealthy tend to just tuck their extra dollars away. So to pay for all this largess the Government needs to introduce higher tax bands: 40% on incomes over $150,000, 45% over $200,000, and bring in a long-overdue universal tax on land.

It’s not just the rural sector. Obviously not. The whole livelihood scenario for all of the citizens of this country is becoming more and more confusing day by day. After years of the government lamenting about the dire lack of NZr’s saving, we are now being told we should now instead borrow and spend! So we are to use increased indebtedness to stimulate the economy.? Go figure!

Authorities want us to have faith in the economy and despite bad news from all sides, borrow and spend like no tomorrow.
However, when asked to borrow and spend on large-scale infrastructure projects, the government turns a deaf ear to the desperate calls from the unified voice of our industries. They'd rather feign fiscal prudence than save the economy and its people from a downward spiral of indebtedness.

I agree JohnTrz, with falling interest rates on Term Deposits you still get hammered at least 17.5% on your interest. The first $20K of everyones earnings should be tax free. hell I can remember when we used to not pay tax on any interest at all, then you could claim it all back then they changed it again so they took a chunk and its gone for good. If you don't like that then how about dropping the tax totally on only your interest earned ? whatever happen to the governments push to save ? now you can even pull your Kiwisaver out early, its all gone to the dogs.

Sigh. Let's start from the top. Agriculture as practiced, is the art of turning fossilised sunlight (fossil fuels) into food. It was always temporary.

But we ran it atop a whole society which turned fossilised sunlight into suburban sprawl, stuff to stuff into the boxes that are suburban sprawl, and digits in bank computers, which everyone hoped would be redeemable.

And the societal conversation avoided this inconvenient circumstance, particularly the temporary nature of it. So we are still back at the '50% see bad times ahead' stage - and apparently believing that 100% believing in pending good times will make them happen. We are stil back at the stage where we think 'investing' will give a 'return'. And we are still back at the stage where we bemoan this or that political party, or action.

Actually, we have to address the Limits to Growth, breaking over us in many ways right now. Sustainability (meaning long-term maintainability, not token recycling or riparian patching) is the only valid goal - and it will include perhaps 50% of the currently-urban echelon to return to food production. And food production will be local, seasonal and would be smart if it understood the need to be biodiverse.

The problem is nothing to do with fiscal drag, GST or anything else - although the debt held in the current system - while it holds - is admittedly a hamstring maneuverability-wise. Almost every commentator forgets that tax isn't 'lost', it's socially redistributed. And the reason for that is that without specialisation, society wouldn't function.

Unfortunately understanding the above plays not part in the training of our Gods, the economists. Ignore something, don't measure it ... because if I do, my economic studies look ridiculous. Ask yourself...they want us to spend up (i.e consume more) to improve the economy! Even a blithering idiot can see that is absurd.

Every economist should go home tonight, leave the car running, the lights, heater on full and the fridge door open....and wake up richer!

The Labour party needs a name change from the Labour party to the Welfare party to reflect its values

Sorry, I don't buy into your tax bracket argument. I tend to argue that it is gst which is the tax demon in this country, implemented mainly due to the unwillingness of higher earners to pay their share. So in the guise of a tax cut for high earners that will mysteriously make the whole economy more prosperous the burden is placed on those lower earners via gst. Thats unfair. As for the rural sector...pretty short on sympathy given all the support it receives in subsidised research, free water, tax free pollution, legislated monopolies, lowcost seasonal workers, employment legislation that allows farmers to put their workers over the barrel or get them from 3rd world countries or both...the list goes on. With all this the sector still struggles...I ask the question; what else could you possibly need to make a very simple industry function smoothly and profitably?

It is actually pretty hard to argue "the unwillingness of higher earners to pay their share". The last time this data was available, those earning $100,000 and more paid 42% of all individual income tax, and those earning $80,000 and more paid more than half of all individual income tax. This is despite the first group accounting for only 9% of all taxpayers and the second group accounting for 14%. To make your claims, you will need to declare what you think the right 'share' should be if you think this isn't enough.

One of the first things the new coalition Government did when they won the Treasury benches was stop publishing this data. It is now a State secret, so we don't know how it changed for the 2018 Budget, or for the 2019 Budget.  Hiding this sort of data will only build scepticism by taxpayers.

"Tax cuts for higher earners" aren't really that at all. They are really only rate rate cuts. The long run Treasury data clearly shows that those on higher incomes are paying an increasing share of individual income taxes.

Here is the last data available.

Where my scepticism grows to titanic sized proportions is knowing full well that higher earners are often able to take advantage of generous taxation concessions via tax planning i.e. using trusts, charitable trusts, loss making entities, the list goes on...to essentially make no tax contribution whatsoever while salaried earners both high and low get nailed by paye and gst. You can't likely extend the same privilages to paye as it would bankrupt the country so surely the higher earners should have those concessions cancelled? Imagine that, you wouldn't have a pothole on anyroad nor leaky, dangerous hospital buildings. Our society might actually function for everybody!

There is an interesting parallel too in the local body areas. That is the basis of levying rates. For example in Christchurch. Two neighboring houses. Same size building same size land. One is old valuation $670K. One is new an EQ rebuild value $1.35mill. Rates for the former $3900.00, for the latter $8100.00. So why does one pay twice as much for the same services, exactly. In fact this translates to a wealth tax. Stark as that.

DC, that's sobering stuff. Still, as soon as Them that Know Best figure out how to measure the Feelz, all of them Old-School Statistics, now hidden, rilly, rilly won't matter.

Sigh....

I dont agree with you regarding GST, the black economy (people who receive cash and don't pay tax) in NZ is reported to be $1 billion.
Currently that cash is taxed at the GST rate of 15% when spent, if GST was abolished the cash economy would not be taxed at all.

Thats an interesting point. Tradies are under the microscope for that too. I have a friend doing some nait compliance work as part of the mbovis mop up and she says its a nightmare dealing with some cockeys with huge non compliance issues coming to light stemming from unregistered animal movements and one can assume cash transactions from the good old midnight saleyards.

Let them start by giving full tax exemption to the first $10/20k interest earned from Bank deposit.