NZ vs Australian Surpluses

Jordan and I have been having quite a vigourous over the levels of the NZ Govt surplus and the Australian surplus.

I started it off here by noting we have a larger surplus than Australia, despite being one sixth their size, yet still get told no money for tax cuts.

Jordan responded with this post and I then responded with a comment on that post. Then Jordan posted again on the issue and so I am pulling the debate back to my blog!

First of all the Australian Operating Balance of $5.6 Billion is calculated in much the same way as the NZ Operating Balance. Our accounting standards are similiar (and with adoption of international financial standards will get even closer from 2007). The NZ Operating Balance last year was a whopping $7.4 Billion.

Now we also have an OBERAC which basically is the operating balance less one off changes and revaluations. It is basically the underlying surplus and is regarded as the best measure of the sustainability of revenue and expenditure. The OBERAC for last year was $6.6 Billion and is predicted to be $6.5 Billion for this year. This is still a huge proportion of overall crown revenue being 13.3% surplus compared to 2.8% in Australia.

One then has the issue of whether it is the operating balance or the cash balance which should be used as a measure of affordability. Well for the last ten years every Government has referred to the operating balance. In fact Labour themselves introduced OBERAC as an even better measure of the operating balance to see what the underlying surplus is.

It is *only* in the last couple of years as the surplus has gotten so large that it has been impossible to claim one can not afford to reduce the tax burden, that Labour has turned to the cash balance and argued that this determines what one can afford.

As I have said previously claiming we need a surplus so large that it not only funds all operating expenditure (which includes depreciation on capital expenditure) but also all new capital expenditure is just not credible. You fund capital expenditure through depreciation over the life-time of the asset.

Putting aside the $2 billion a year for the superannuation fund, and say a prudent surplus of 1% of GDP being another $1.5 billion, I estimate there is easily $3 billion available for tax relief.

As others have pointed out this is also overlooking the huge amount of wasteful expenditure that we read about every day, such as $120 million of community education scams. Just because the Government is spending more money does not mean it it all producing benefits for NZ. But we’ll try and estimate that another day.

So what could we do with $3 billion of tax reduction:

$585 million to lower business rate to 30%
$300 million to lower 33% personal rate to 30% (applies from $38K to $60K)
$600 million to increase the threshold for top rate from $60,000 to $100,000
$960 million to lower 21% tax rate to 18%
$480 million to lower 39% tax rate to 35%

It would vary a bit from this due to combinations of changing thresholds and rates, but not much. So we would have tax rates of:

15% up to $9,500
18% between $9,500 and $38,000
30% between $38,000 and $100,000
35% above 100,000
And company rate of 30%

That is the best Xmas present we could give New Zealanders!