The New Zealand Inland Revenue Department (IRD) has issued the Briefing for the Incoming Minister of Revenue, outlining the state of the national tax system and evaluating the effectiveness of current tax policies and potential future tax changes.

According to the IRD, the tax system in New Zealand “…is in a good place. The tax bases are broad, robust and provide reliable sources of revenue to fund Government programmes. The broad tax bases and the relatively low tax rates make the tax system among the most coherent in the OECD.”

The briefing outlined several options for potential tax changes in New Zealand, such as shifting the majority of tax payments away from income payments towards capital gains and consumption expenses. However, the previously completed research by the IRD does not suggest that any of the potential changes would result in any significant improvement in the efficiency or effectiveness over the current tax system.

In the next few month the IRD and the Minister will begin discussing a new work programme to ensure that any future changes to the national tax system continue to be efficiently implemented and in line with the government’s economic goals.

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On September 30th the international credit rating agency Fitch Ratings announced that it has cut New Zealand’s credit rating from AA+ to AA. World markets immediately reacted to the news, with the New Zealand Dollar falling to a six month low and yields on New Zealand 10 year notes rising by 2 basis points.

New Zealand’s high levels of net external debt were cited as the primary reason for the downgrade, and currently it stand at 83 percent of the national GDP, compared to an approximate median of 10 percent for other countries with an AA credit rating by Fitch Ratings. The excessive debt levels are accompanied by persistently high current account deficits, which Fitch projects to reach 4.9 percent in 2012 and 5.5 percent in 2013. New Zealand’s recent GDP growth levels are also regarded as low, with the five year average growth reaching only 0.7 percent, compared to an average of 1.1 percent for AA rated nations and 1.4 percent for AAA rated countries.

New Zealand’s credit rating has been on a negative outlook since June 2009, but is now regarded as stable following the downgrade. According to New Zealand and international analysts, the country’s financial positions are being further exasperated by current international financial markets, which are now growing increasingly debt averse in the face of the looming default risks in Europe.

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The possibility of a temporary earthquake relief tax is back on the table in New Zealand, as the costs of rebuilding private housing alone in the quake struck areas alone are revised from NZD 4 billion to NZD 7.1 billion.

On August 30th the Finance Minister of New Zealand Bill English revealed the newly recalculated costs for the New Zealand earthquakes, saying that initial estimates were far below reality, and it is estimated that the cumulative costs for the government could now run as high as NZD 12.1 billion.

The Minister said that the government had not prepared for such high recovery costs, and efforts would now be expanded to find new and viable revenue streams to pay for the aftermath of the earthquake. Currently the primary considerations for extra revenues were an overhaul and redesign of the already instated national Earthquake Commission levy, proposed by the ruling National Party, and introduction of a temporary earthquake levy, as proposed by the New Zealand Green Party.

The National Party has not yet finalized any estimates regarding potential revenue increase from their proposed changes. However, the Green Party co-leader Russel Norman has already said that an extra NZD 1 billion in tax revenues could be raised by introducing a temporary levy on personal incomes. According to Russel Norman the new tax would be charged at a rate of 1.5 percent on personal incomes between NZD 48 000 and NZD 70 000, and increased to a rate of 3 percent on all earnings in excess of NZD 70 000.

On the same day, Labour party leader Phil Goff came forward to say that the rising costs of the earthquake should be addressed with a capital gains tax on second homes and investment properties, in line with his party’s previous plan to introduce a capital gains tax in New Zealand.

Since September 2010 the city of Christchurch in New Zealand has experienced three major earthquakes and continued aftershocks. The death toll from the earthquakes has reached 185 people.

Photo by Mike-Campbell

In a press release issued on July 18th Statistics New Zealand confirmed that the prices of everyday items are rising faster than in recent years. According to data contained in the release, New Zealand’s annual inflation rate has hit 5.3 percent, which is the highest level seen in the country during the last 21 years.

Approximately 2.3 percent of the rise is attributed to last year’s Good and Service Tax (GST) rate increase, which saw the tax rise from 12.5 percent to 15 percent. According to Statistics New Zealand estimates, if the GST rise had not been instated, the annual inflation rate would only be approximately 3.3 percent. The previous inflation peak was also largely attributed to a GST rate hike, which saw the tax rise from 10 percent to 12.5 percent.

Since the inflation rate announcement was made, analyst have been debating the longer term repercussions of the economic event. According to some international analysts, national core inflationary pressures were relatively steady, and headline inflation figures would normalize in the short term, after the effects of the tax increase had worn off. However, it was also pointed out that much of the inflation can be attributed to disproportionate increases in food prices, along with increases in costs for petrol and tobacco products, and that any future hike to excise duties would make a further significant upward impact to the national inflation rate.

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On June 20th the Prime Minister of Australia Julia Gillard and the Prime Minister of New Zealand John Key spoke at a joint press conference in Canberra, announcing that the two countries are set to work together in an effort to form a cooperative emissions trading scheme.

Julia Gillard and John Key explained that the economies of Australia and New Zealand are closely linked, creating an opportunity to form a strong and effective bilateral emissions taxation system. The Australian Prime Minister said that tax authorities and policy makers from both countries would soon begin work to amend rules and create legislation which would allow for businesses on either side of the Tasman to trade carbon credits between the two jurisdictions. In 2008 New Zealand instated its own emissions trading scheme, which requires polluters to purchase emissions units for the amount of carbon dioxide they release into the atmosphere. Operators with unused units are able to sell their allocation to other producers, if they wish.

On the same day, leader of the Liberal Party of Australia Tony Abbot put forward a private member’s bill that calls for a public vote to be held regarding the future country’s emissions tax system. According to an announcement made by the Australian government late on June 20th, the bill could potentially be brought in front of the national Senate as early as June 23rd. The Australian Green party has already called the move a “political stunt”. Near the end of the day Tony Abbot commented on his proposal, saying that it would cost the government approximately AUD 69 million to hold the referendum.

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