Snakes and ladders, and the Budget

Now that the dust has settled on what was one of the most anticipated Budget announcements in recent memory, it’s time to ask what the Budget’s proposed changes really mean for New Zealand’s economy and for New Zealanders personally.

The Budget in a nutshell

The 2010 Budget has heralded in the following:

• A drop in personal marginal tax rates
• An increasing of the GST rate to 15%
• The removal of depreciation claims on buildings
• Proposed changes to the LAQC regime
• Extra funding for audit activity at the IRD
• An alignment of the highest personal marginal tax rate and the Trust tax rate
• An increased attractiveness and competiveness of New Zealand.

The Government’s been thinking

There is no doubt about it. Some deep thinking has gone on behind the scenes. This Budget has been brought in to stimulate the economy by encouraging productivity and savings. An additional aim was to dilute the love affair New Zealanders have with residential property with an objective of enticing people to invest in areas such as investing their capital in businesses.

How has the Government managed these goals? Well, to start with a nice ladder up the money chain has been introduced. Marginal (personal) income tax rates have been reduced from 1 October 2010. This change has been instituted because research has shown that when income tax rates are high, they act as a brake or a disincentive to increase income. This of course has a run on effect on productivity. After all, there is no point in producing more if all you are going to do is pay more in labour costs and tax and earn yourself very little in the process. 

Additionally the thinking behind lowering the tax rates is that this should lead to an increase in productivity and labour. That’s got to be good for the country as increases in productivity and labour mean a greater demand for labour and consequently a decrease in unemployment.