The importance of tax cuts

Bill English’s office has put out a comparison of real (CPI adjusted) net (after tax) wage growth for a full-time worker on the average (mean) wage.

The Australian data only goes back to 1994, so the first time period compared is Sep 1994 to Sep 1999 – the final quarter before Labour took office.

During those five years the real net income for a FT worker on the average wage rose 13.2% in New Zealand and 6.2% in Australia.

Then over the next nine years from September 1999 to September 2008, the increase in New Zealand was 3.0% and in Australia it was 19.3%. Yep six times greater in Australia. They had high wages, low inflation and tax cuts. We had no tax cuts, higher inflation and lower wage increases.

From Since September 2008, to June 2010, the increase in New Zealand has been 8.7% vs 4.8% in Australia.

If one translates this to average annual increases, then the comparison would be:

• Sep 94 – Sep 99 – 2.6% NZ vs 1.2% Aust
• Sep 99 – Sep 08 – 0.3% NZ vs 2.1% Aust
• Sep 08 – Jun 10 – 5.0% NZ vs 2.7% Aust

Now the time periods used are slightly cheery picked, in that the latest period includes both the April 2009 tax cuts and the October 2008 tax cuts – so they do not correspond exactly to Government terms. But on the other hand Labour did the Oct 2008 tax cuts most grudgingly, because of the election, and probably would ave cancelled them if they had retained office.

The stat that stands out to me is that during those nine years from Sep 99 to Sep 08, the average after tax income only grew 0.3% a year. Fiscal drag mean someone on the average wage paid more and more tax as their salary increased.