IMF Publishes NZ Fiscal Policy Advice

May 27, 2010 Taxation in New Zealand

International Monetary Fund [oct 25]The International Monetary Fund (IMF) has published a new paper on the potential effect of further fiscal policy changes in the future growth of the New Zealand economy.

On May 26th the IMF published The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand, a working paper dealing with possible New Zealand fiscal policy rebalancing. The paper stated that New Zealand has weathered the global economic recession relatively well, but will continue to suffer from persistent current account deficits. New Zealand also has low per-capita income levels, when compared to other advanced economies. In response to these two issues, the paper advises decreased Government spending and tax balance shifts for New Zealand.

The paper specifically suggests that the New Zealand Government implement further fiscally neutral shifts in the taxation balance of New Zealand, towards consumer-side taxation and away from capital and labour taxes. According to the IMF, any negative effects of public consumption caused by hikes in Goods and Service Tax (GST) rates will not only be reversed within 3 years, but consumption will exceed previous baseline levels. Cuts in personals taxation will also result in higher levels of business sector investment. Although if the increased revenues from higher GST levels are redistributed into the economy in the form of transfers, the benefits from the fiscal shift will be greatly diminished, if not entirely neutralized.

The research also detailed the theoretical benefits of greatly reducing Government spending. If the New Zealand Government’s consumption expenditure is permanently capped at 1 percent of the national GDP, the public debt ratio would diminish by approximately 20 percent. The lowered debt servicing charges faced by the Government could then be transferred into further tax cuts. Within 8 years, increases in private-sector demand would lead to a 0.5 percent rise in New Zealand’s GDP level, above the baseline. In the long run, GDP is projected to increase by an additional 2 percent, above the levels seen at the time of the policy change. Additionally, real interest rates would ultimately remain below current levels, following the reduction in spending.

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