NZIER on fiscal sustainability

NZIER have done a discussion paper on NZ’s fiscal sustainability.

Their key findings include:

• Without significant changes in fiscal policy, government debt is projected to head towards 200% of GDP by 2060.  
• We cannot afford the same spending patterns and tax settings as in the past. Something has to give, and we have to start thinking about the trade-offs sooner rather than later.
• Recent efforts to get the books back in black after the Global Financial Crisis and the Christchurch earthquakes have been commendable. 
• The evidence shows that overly high taxes can be harmful to economic growth. 
• In reality, we would expect fiscal adjustments to come about through a combination of lower government spending, broadening the tax base as well as lifting existing taxes.    

I’m against any lifting of existing tax rates, but not against broadening the tax base. Basically the level of tax burden as a percentage of GDP should drop over time, as that helps economic growth. This means most focus, in my opinion, should be on spending restraint.

They recommend:

• Seeking a bipartisan agreement on meeting the costs of superannuation 
• Focusing the social safety net on those who need it most, rather than the middle class 
• Broadening the tax base to include a tax on land or a tax on capital gains
• Better highlighting the choices of taxes and spending that are feasible for any given level of debt level over the next few decades so that Kiwis’ expectations can be better managed, and so that they start preparing themselves for a tighter fiscal future.   

I support all those. I think a land tax has significant economic value, and a capital gains tax is also useful, so long as it is comprehensive. But again, there should be reductions in company and income tax rates to compensate so it doesn’t just become a greater tax burden overall.

The paper is 26 pages long only, so very readable and a good contribution to the debate.