In this issue of Focus on Finance I talk about the 01 October changes to the tax law, with particular emphasis on personal tax rates and GST. I also discuss changes to rules around foreign investment, the Canterbury earthquake recovery process and the economy's status after five successive quarters of growth.

1 OCTOBER TAX CHANGES GOOD FOR THE ECONOMY


Click here to watch my policy briefing video on the tax changes.

The Government's tax changes which took effect last Friday will strengthen economic growth and help New Zealand families get ahead. While there has been a lot of talk about how these changes affect people's hip pockets we must remember the important economic reasons behind the changes. As well as improving the incentives to work, the tax package tilts the economy towards savings, investment and exports and away from the unsustainable borrowing, consumption and over-investment in housing of the past decade.

Treasury estimates the tax changes will add about 1 per cent to economic growth over the next few years. The changes are one of many steps in the Government's programme to get the economy growing faster.

At all taxable income levels, the personal tax cuts more than offset the rise in GST - and once the full package is in place low, middle and high income groups broadly receive the same proportionate increase in disposable income. The changes leave an average family about $25 a week better off and an average wage worker $15 a week better off. For more information you can read my statement on the changes, view a table showing how the tax changes affect different wage levels, or calculate how much you will benefit at www.taxguide.govt.nz.

CHANGES TO FOREIGN INVESTMENT RULES STRIKE BALANCE

Last week I announced changes to the foreign investment rules to give Ministers more flexibility to consider a wider range of issues - including large-scale ownership of farmland. At the same time the changes provide extra clarity and certainty for potential investors by identifying areas where the Government will apply a higher degree of scrutiny. For more details you can read my statement or watch the press conference.

They follow changes last year that cut red-tape and almost halved application times. Taken together these changes strike a balance between encouraging overseas investment, where there are tangible benefits, while acknowledging valid concerns about the sale of large tracts of farmland overseas.

CANTERBURY EARTHQUAKE

As Finance Minister and Minister responsible for EQC I've visited Canterbury twice since the earthquake to talk to affected residents and get a sense of the issues on the ground. Alongside people's personal concerns there have been a lot of questions about the fiscal and economic impact of the earthquake.

Treasury has estimated the total cost of earthquake damage could be about $4 billion. Most of this bill will be met by the Earthquake Commission and private insurers. In addition Treasury is predicting the quake will hit economic growth in the next two to three months, before providing a small boost as reconstruction activity kicks into full gear.

The Government has been quick to offer assistance including:

• $15 million for the wage subsidy scheme for employees at quake-affected businesses.
• $5 million for the Mayoral hardship fund.
• $7.5 million for community restoration projects and
• $2.5 million for trauma counselling.

In addition we will have to pick up the tab for damage to central government assets and contribute to the cost of repairing local government assets where they could not be insured. We would expect these costs to eventually run into the hundreds of millions of dollars. While from a fiscal point of view this is not ideal, it is manageable because of the work we've done over the past 18 months to put the Government's books in order.

FIVE QUARTERS OF GROWTH

A fifth successive quarter of economic growth is another sign the recovery is continuing - although it is clear it will be bumpy at times. While the 0.2 per cent growth was below expectation, the data was uneven across different parts of the economy. Total domestic spending fell slightly, while exports had their second strongest quarter on record, with volumes up 7 per cent from their lows of 2008. This trend towards saving and exporting more, and spending and borrowing less, is what New Zealand needs to build stronger long-term growth. You can read my statement here.

Looking ahead, I expect some volatility in the next few quarters of GDP data with the Canterbury earthquake and uncertainties about the global outlook. This reinforces the need for the Government to press on with its comprehensive plan for turning around the economy.

THINGS TO LOOK OUT FOR

• Mid-October: Treasury will release Crown Accounts for the year to 30 June, 2010.
• 18 October: Statistics New Zealand will release CPI data for the June quarter.
•  28 October: The Reserve Bank will issue its latest Official Cash Rate review.

Regards,

Hon Bill English
Minister of Finance

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