Last Friday, Treasury “pro-actively” published its November 2023 Briefings for the Incoming Government. One was on the economic and fiscal context. It was for the new Minister of Finance. 


Its headline message was that macroeconomic and fiscal restraint is needed. Treasury recommends a return to fiscal surpluses by 2026/27. It  considers that both spending cuts and higher tax revenues will be needed.  


On tax, Treasury’s “first best advice” is to address the following two “structural issues”: 

• The “non-alignment” between the company tax rate (of 28%) and personal tax rates (of up to 39%); and 
• “The lack of a comprehensive capital gains tax”. 
  
  

The first point is unexceptional. The fourth Labour government sensibly aligned the company rate, the rate for trusts and the top personal tax rate at 33%. Along with its new fringe benefit tax, that greatly simplified tax administration and compliance.  


Subsequent governments have wrecked that alignment.  


Treasury’s second point is more surprising. The problems with a comprehensive capital gains tax are practical, not ideological: 

• How are year-to-year gains and losses in intellectual capital and in many other hard-to-value capital items to be valued?  Valuations will be costly to defend.  
• What is a capital gain when inflation is taken into account? Which price index is to be used, and why? 
• How are widows and others going to get the cash to pay the tax without selling the family home, farm or business? 
• Will Inland Revenue pay out symmetrically for capital losses? Probably not, but a failure to do so reduces the incentive to invest in risky assets. 

For these and other equally non-ideological reasons, a political party that promises to apply a comprehensive capital gains tax in New Zealand has yet to make itself felt. The family home seems to be sacrosanct.


In any case, we do not have fiscal deficits today because revenues are low. In 2016-17, tax revenue amounted to 27.5% of GDP and the government was in fiscal surplus. Treasury forecasts a substantial deficit in 2023-24 despite forecast tax revenues of 29.1% of GDP.  


The real problem is that forecast core Crown spending for 2023-24 is a staggering 5.7% of GDP higher than in 2016-17.   


Today’s fiscal problems are the product of wasteful and ill-justified spending on a grand scale.  


Treasury can hardly tell the public this bluntly. It needs to be seen to be politically neutral.