Cameron Bagrie: Bring on the tax debate

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Cameron Bagrie. Photo / Alex Burton
THREE KEY FACTS
Cameron Bagrie is principal of Bagrie Economics.
OPINION
We have an ageing population. The Government is running structural deficits and projections of returning to surplus are based on frugal spending assumptions that stretch credibility.

Add into the mix the need for geopolitical-driven rises in defence
spending, infrastructure deficiencies that need to be addressed and the cost of decarbonisation, the potential for continued natural disasters, a divided society, and the need for structural changes in many areas and the need for more government revenue is apparent and along with that a deeper discussion on where to find it.

If you accept that basic equation and this year’s Mood of the Boardroom survey shows a majority 77% agree with the proposition that we need structural changes, then the questions become what changes, and/or who pays?
The 2026 election looks set to be feisty with tax a central issue. Sentiment appears to be shifting on a capital gains tax.
We can aspire to get a better public service and value for money but the maths of what we are facing is huge.
Tweaking New Zealand Superannuation (NZS) lessens the pressure but does not change the government’s need for more income, and that is before issues of fairness and equity come into play on the tax burden.
Tax is not just about funding expenditure needs. Businesses are aware of the corrosiveness a divided society has on the economy, recognising a key role of government in wealth inequality is ensuring minimum levels of welfare and income (67% of respondents), and favouring taxing realised gains on assets in addition to income (41%).
Local authorities are at the coalface of the need for more revenue, pulling the double-digit rates rip cord, hitting property owners. With an operating deficit of around 22% of rates income, this year’s 15% rise is not even sufficient to return into the black, and that is before inflation and infrastructure needs are accounted for. With local authority employee costs up 13.2% in the past year, the “cut your cloth” message has yet to sink in.
The tax burden is already rising via the local government sector for now, with rates of income rising 10.2% in the 12 months to June 2024, and 30% since 2021. The rate increase in September 2024 is around 15%. Society will voice displeasure in next year’s elections, forcing other options to be canvassed.
The Government’s Policy Statement on Land Transport included a $6 billion unfunded gap between expenditure intentions and the current net revenue forecast. That is around 1.5% of the current economy and a non-trivial amount of revenue to find. The document warns of additional revenue from alternate funding sources including new tolls, time of use charges and value capture mechanisms.
Funding for Three Waters remains unclear. A lot more borrowing is on the agenda, but that also requires more income to service it. We are replacing dilapidated infrastructure, which does not have the same revenue capture as new infrastructure (if the new infrastructure is aligned with growth, built cost-effectively and managed well, which we do not tend to do).
Treasury’s 2021 Statement on the Long-Term Fiscal Position projected NZS expenses would increase from 5.0% of GDP in 2021 to 7.7% by 2061, due to demographic changes. Health expenditure is projected to rise from 6.9% of GDP in 2021 to 10.6% in 2061.The latest IPSOS Issues Monitor has shown health rise to be households’ second largest concern, behind inflation. If tax is shaping as one election issue, health promises to be another.
The combined rise in healthcare and NZS as a share of the economic pie (GDP) over 40 years is 6.4 percentage points. To fund the status quo based on historical spending trends, you need another tax-generating revenue equivalent to the income sourced from Goods and Services Tax, to more than double the company tax rate or lift income taxes by 50%.
Company and individual income taxes need to fall to attract investment including people, not go up. But that’s infeasible financially unless revenue is sourced from elsewhere, including the likes of a realised capital gains tax as an option and other revenue-broadening measures.
The “baseline” of no policy change has government gross debt rising to 200% of GDP, an obviously unsustainable position. A strong economy scenario (via better productivity growth) is not sufficient to alter a rising debt trend either which leaves two options; lessen the entitlements or find more revenue.
Expect pressure from our Aukus “friends” to lift defence spending.
We are not going to have a world-class economy unless we have a world-class education sector, and one key outcome we need to see is paying teachers more, a lot more, with the catch of measurement. That will not be cheap.
The Treasury has come about as close as they could possibly to saying the fiscal forecasts are fanciful in the 2024 Budget with “caveat emptor” warnings everywhere and the departing Secretary of the Treasury has recently called for changes to NZ Super and a capital gains tax.
Heavy hitters such as the OECD and International Monetary Fund have consistently favoured revenue-broadening measures including a capital gains tax, with both coming out in favour again in their 2024 economic assessments for New Zealand.
READ MORE: Click here to read the full Mood of the Boardroom report
Some business heavyweights are expressing a similar view, one being Mainfreight co-founder Bruce Plested, subject to any additional revenue being wisely spent.
Our biggest hole though is the economy and fanciful assumptions about the economic base and productivity, upon which our well-being is premised.
As if by magic, a declining trend in productivity is expected to reverse. Productivity for the whole economy averaged 1.4% per annum between 1993 and 2013 but averaged only 0.2% per annum over the last 10 years. Treasury is still assuming an improvement in productivity growth over the next few years towards our long-run productivity growth assumption of 1% per year.
Exports as a share of GDP have been on a worrying downward trend. Tourism is at 83% of pre-Covid levels and the primary sector has been hammered. Vangelis Vitalis, New Zealand’s Chief Trade negotiator talks of the end of the golden era for trade. The energy situation is turning into a crisis undermining manufacturing competitiveness. Seasonally adjusted sales for the electricity, gas, waste, and water services industry in New Zealand increased to $7.9 billion in the June 2024 quarter, up 36% on June 2023.
Lacking a firm economic base, government revenue is going to face more pressure.
This year’s Mood of the Boardroom survey is another nail in the coffin for a much-needed debate on tax and sacred cow entitlements such as NZ Super. If we could maintain Super at the current share of the economy for the next decade, it would free up $54 billion for infrastructure. Those are the sort of trade-off discussions that we face. Bring on more debate.
Any politician saying the status quo is sustainable or affordable needs a refresher in maths.
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