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May 31, 2010 | by  | in Features |
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The semantics of fairness: Budget 2010

Salient writer Paul Comrie-Thomson takes a closer look at the recently announced Budget, and some of the meanings behind all the jargon used by politicians and what effect of the much-lauded tax cuts may have on Kiwis.

The actual contents and impact of the government’s annual Budget are often difficult for the average Joe to understand. We’re bombarded with information and analysis in the media. Added to this is the plethora of alternative translations and interpretations put forward by various political parties and interest groups. The 2010 Budget, with its key focus on tax reforms, is no different.

Director of Victoria University’s Institute of Policy Studies Jonathan Boston helps to clarify the Budget as a whole: “In broad terms the Budget is relatively consistent with what one would expect from a central-right government.” He explains that this is down to the “clear desire to reduce the overall level of public expenditure as a percentage of GDP over time, and in the desire to reduce tax rates, particularly on middle to high income earners”.

However, Boston is quick to comment that the current government has exercised a certain level of restraint, as many “central-right governments might well have reduced public expenditure more significantly than the current government has done”.

“Certainly by comparison with the National Government of the early- to mid-1990s, there were rather more significant changes then, to social assistance, health and education than have been signalled thus far under this government.”

Boston says that this reflects the pragmatism of New Zealand’s current politicians working in an MMP environment. This compares to the ideologically driven political behaviour that was evident in New Zealand politics in the late 1980s and early 1990s. He says that as a result of the coalition agreements that have eventuated because of MMP, “it may well be that the Maori Party exercised a restraining influence on policy in a number of areas, such as primary healthcare for example, that might have occurred otherwise”. Despite recognising that there are only a small number of elements in the Budget that are clearly positive from the Maori Party perspective, Boston believes that the Maori Party no doubt affected certain changes from behind the scenes.

Bill’s ‘fair for all’ budget

In an interview with Q+A’s Guyon Espiner following the Budget announcement, Minister of Finance Bill English said the government believed that this Budget was fair across the board. He specified that the government “paid quite a bit of attention to the various measures of fairness and equity”, and that “background papers will show that all those measures have been applied”. He believes the government has “achieved a good balance of fairness between people, lower and higher on the income scale”, but more importantly he said that the intended increases in economic growth would ensure that all New Zealanders could “get ahead”.

Across the floor, the Labour Party’s Finance Spokesman David Cunliffe has slammed the Budget not unexpectedly, saying that, “this is really an old-fashioned National party budget that rewards the few at the expense of the many”.

Cunliffe is particularly concerned about cuts to government spending over a number of sectors. He believes that “the quality public services Kiwi families depend upon—like good healthcare when illness or accidents strike, and a great school for the kids—will all come under huge pressure from the cuts to spending”.

Green Party co-leader Dr Russell Norman has also raised concerns that the Budget tax trade-offs will effectively “widen the gap between New Zealand’s haves and have-nots”.

“The tax cuts in this National, ACT and Maori Party budget will go mostly to the well-off, while raising GST hits those on low incomes disproportionately. It punishes those who already struggle to make ends meet. And the punishment falls most heavily on Maori and Pacific peoples. So this Budget will increase inequality and increase the social deficit.”

These various interpretations have been repeated time and again in both pre- and post-Budget analyses, press releases and news segments. So how does this Budget actually measure up in terms of fairness?

Boston believes that “from a static point of view, it is slightly regressive; that is to say, the distributional shifts favour to middle to high-income earners, at the expense of low-income earners. Essentially the changes are likely to increase inequality, rather than increase equality”.

However, he says it is important to recognise that from “a dynamic point of view, the changes may not be quite so regressive, and so over the medium to long run, and from a life-time earnings point of view, the changes may not be significantly regressive”.

A ‘tax swindle’?

Professor Robert Buckle, chair of the Tax Working Group who devised the changes in taxation as announced in the Budget, points out “you really have to pin down what people mean by fairness”.

In contrast to Boston, Buckle thinks that from a static perspective, “it is fairly well recognised that, for salary and wage earners, the combination of the cut in personal tax rates plus the GST increase, means that right across all income levels, people will have more disposable income after tax”. Buckle also believes that “in a dynamic sense, there are quite widespread benefits”.

Buckle says that there were a lot of “loopholes in the tax system that were advantageous to some people—particularly people who had opportunities in accumulated wealth, and could invest them into certain types of savings vehicles”. Therefore, “If the tax system had been left alone, the after tax distribution of income would have been possibly unfair. I don’t think a lot of people appreciate these kind of issues.”

This underscores what Buckle outlines were the aims of Tax Working Group, in ensuring New Zealand was facing the future with a tax system that was fair and sustainable.

“The international research, which is pretty robust, has emerged over the past twenty years as a result of quite sophisticated micro-econometric research and as a result of econometric panel estimation studies of different tax structures across different countries, and it suggests that taxing company incomes, and taxing personal incomes tends to be more damaging for growth, entrepreneurship and innovation.”

Buckle explains further: “The IMF have simulated this tax switch, very much along the lines we advocated, and it reinforces the argument that this sort of tax switch can lead to higher savings rates, higher investment, higher employment growth, and higher real wage growth. Therefore, those who are unemployed will benefit by stronger employment growth. Those on salary and wages will benefit from higher labour productivity and real wage growth, so that’s how these things come through.”

Analysing the benefits of changes in what is taxed, and with the hike in GST central in most people’s minds, Kiwiblog’s David Farrar outlined some benefits of increasing GST, illustrating that, compared to income tax, GST is easier to administer, difficult to avoid and covers a wider base.

Far beyond adhering to what Labour Party leader Phil Goff refers to as a tax swindle, the results of this tax switch could see reductions in both incentives and the distinct abilities for the wealthiest in New Zealand’s society, to avoid paying the correct tax rates relative to their earnings and overall wealth. New Zealand thus may be facing a tax system that is indeed fairer across the board.

What about education?

So what did the Budget hold in terms of funding for the tertiary sector? While the cuts in income tax and increases in GST affect every New Zealander, one would hope that the government’s commitments to tertiary education would be of particular interest to readers of this particular publication.

As reported by Salient straight after the Budget announcement, there were really no surprises. Tertiary Education Minister Steven Joyce outlined that “while we are committed to interest-free student loans, it is important we are fair to taxpayers and remove any perverse incentives from the scheme as it stands”.

Joyce says that in the face of the increasing costs of the student loan scheme, the government is intent on improving accountability and boosting performance within the tertiary sector.

The initiatives announced in the Budget include a focus on performance, which will require students to pass more than 50 per cent of full-time courses over a two-year period, in order to be allowed to continue borrowing. Furthermore, the government has placed a “lifetime limit” on access to student loans, outlining that there is to be a seven-year borrowing limit for an undergraduate degree.

The fees around borrowing have also increased, with the Student Loan administration fee increasing from $50 to $60, as well as the introduction of a $40 annual “account fee” to be applied at the completion of studies. It was this fee that led Green Party tertiary education spokesperson Gareth Hughes to accuse the government of trying to “charge interest by stealth”.

Addressing the costs of increasing enrolments, highlighted by Victoria University’s inability to accept further domestic admissions for the remainder of 2010, Joyce has said that “Budget 2010 will build further on last year’s record number of student places and ensure access for young people who are keen to succeed and committed to New Zealand”. However, there has been no increase in funding to cover this. The package includes ensuring 1735 additional full-time places at universities, but as Labour Party tertiary spokesperson Maryan Street explains, “These are not 1735 new students. Most of them are already in universities but being carried and funded by the universities themselves.”

Street continues, saying “This goes nowhere near meeting demand in these institutions, and certainly goes in the opposite direction from other countries like Australia, which is investing heavily in very real terms in its tertiary education institutions.”

In light of this, one might argue that the tertiary sector got dealt a fairly raw deal. However, compared to the cuts in funding for early childhood education—a sector which has been proven to offer the most bang for the buck in terms of educational effectiveness—as Boston explains, politics was on the tertiary sector’s side this round.

“The government could have decided to charge interest on student loans, if not for students currently studying, then for those who have finished their studies—but with half a million New Zealanders having student loans, that would have been very unpopular. I suspect a modest reduction of funding to early childhood education was easier than some other policy choices would have been.”

Before you complain about how unfair the lack of funding in the tertiary sector is, do keep in mind that by cutting back on the funding for early childhood education—in what is arguably children’s most crucial developmental stage—perhaps John Key is simply ensuring there will be significantly less competition for YOUR job 20 years down the track? Just saying. Maybe it ain’t so bad after all. But then again, only time will tell.

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  1. Toni New says:

    “Before you complain about how unfair the lack of funding in the tertiary sector is, do keep in mind that by cutting back on the funding for early childhood education—in what is arguably children’s most crucial developmental stage—perhaps John Key is simply ensuring there will be significantly less competition for YOUR job 20 years down the track? Just saying. Maybe it ain’t so bad after all. But then again, only time will tell”

    Great finally acknowledgement that as an Early Childhood Teacher our profession is indeed a pivotal one. Yes indeed only time will tell….however how sad for this budget to affect the next generation in this way. As a professional in my field I have spent the past 18 years encouraging others to acknowledge the role we play as important. And in one night this was crushed by our Government saying 80% funding is all we need. How can a centre provide quality education with only a percentage of knowledgeable staff. We employ well over the minimum regulation standards to ensure we provide a high quality centre. The government funding only covered the “minimum standards” not quality now this has been cut how do we support the 3 students we have in training and encourage them to finish their Teacher training when we cannot guarantee them a job at the end of it… this is a really sad affair. We were aiming to meet the governments own strategic plan and aiming for 100% qualified Teachers. We mentor our students to support them professionally and this is how we are treated as professionals. We are sad our profession has been treated this way. I only hope it doesn’t take another generation to see this is not alright for our future leaders.

  2. dsi says:

    I am very glad to have this useful information.This is the place where I always get new stuffs.actually few days ago we friends had discussions on this topic but nobody was clear.

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