LOWER UNEMPLOYMENT PEAK EXPECTED

Unemployment data this week is expected to show a lift in the number of jobless. However there are some glimmers of hope on the horizon.

In the Budget in May, Treasury was predicting unemployment to peak at 8 per cent in the second half of next year. There are strong indications now that it will peak lower - possibly around 7 per cent - and sooner than previously thought.

This is due to a combination of factors - better performance by our trading partner economies, a lift in commodity prices and the Government's continuing focus on protecting jobs. While this is encouraging, I'm concerned about the loss of any job, which has a profound effect on workers and their families. That's why it is critical we get a step change that permanently lifts our economic performance. That will be the focus of Budget 2010. [Click here to watch my latest video briefing on this topic.]

THE DOLLAR

The Government is acutely aware of the impact the high dollar is having on our exporters and our recovery. You can read my blog on the subject here.

Clearly, the dollar is stronger than we would expect at this point in the economic cycle - due mainly to the weakness of the US dollar and the Sterling. The best action Government can take to avoid putting added pressure on the dollar is to keep its own house in order and ensure that others have incentives to do the same.

We have a clear plan to control public spending and debt, reducing pressure on both the exchange rate and interest rates. We are also firmly focused on lifting New Zealand's rates of productivity, which have languished in recent years. This will help exporters become more competitive and give them to confidence to invest and create sustainable jobs.

CROWN ACCOUNTS

The annual financial statements are a reminder that, while there are some promising signs that the recession is easing, there remain some significant challenges.

The $10.5 billion deficit to the year to June 30, 2009, was larger than forecast in the Budget in May, as tax receipts fell, spending increased sharply to support the economy through the recession and several Crown investment portfolios - like the Super Fund - sustained significant losses.

Faced with expected deficits of $10-12 billion over the next four years, it means we are going to have to borrow about $250 million a week on average over that period. That is why the Government is focused on keeping a tight rein on spending for the foreseeable future.

REVIEWING THE TAX SYSTEM

There has been a lot of interest recently in the Tax Working Group. The group - led by Victoria University's Centre for Accounting, Governance and Taxation Research, is looking at potential improvements to the tax system.

The aim is to see if there are changes that can simplify the system, improve fairness and lift economic growth without increasing the overall level of taxation. The group, which is free to look at any aspect of the tax system, will provide the Government with a report in December.

Last month I gave a speech to the Institute of Chartered Accountants in which I made it clear that any proposed changes would have to meet some crucial tests if they were to be seriously considered by the Government. Equity and fairness will be key considerations alongside benefits for the economy and for households.

REGIONAL EXPORTS



As Minister of Finance, I'm a firm supporter of regional development, so I was very pleased last week to see the conclusion of a major log deal between Canterbury and Southland. The log in question was the Ranfurly Shield. Attending the victory parade in Invercargill last week, it was obvious the victory has given Southland a big lift. Hopefully this boost in confidence will help underpin the recovery in the region.

To share your thoughts about this newsletter, click here.

China's Vice Premier Li Keqiang, will visit New Zealand from 1-3 November, Deputy Prime Minister Bill English announced today. 

The Vice Premier will be accompanied by a 50-strong delegation and visit Christchurch, Wellington and Auckland. 

"The Vice Premier's visit is further evidence of the strength of the economic and political connections between China and New Zealand. 

"We have just celebrated the first anniversary of the China-New Zealand FTA, and trade between us is growing very well. The visit offers an excellent opportunity for us to discuss a range of issues of importance to the relationship," Mr English said.

The Vice Premier will have meetings with Prime Minister John Key and Mr English and attend an official Ministerial dinner hosted by the Prime Minister.  

In Christchurch, his delegation will visit Canterbury University where the Vice Premier will open New Zealand's second Confucius Institute.  He will also visit a farm at Lincoln University and attend a dinner hosted by Christchurch Mayor Bob Parker.

Administrative Arrangements on educational cooperation, dairy products, temporary workers, and meat products will be signed during the Vice Premier's visit.

Finance Minister Bill English has welcomed Treasury's Long-Term Fiscal Statement, which outlines some of the challenges and choices successive governments will face over the next 40 years. 

"This is an important report that is produced at least every four years and contains projections out until 2050," Mr English says.

"This report highlights the stark choices New Zealand faces if it is to avoid an explosion of public debt.

"Doing nothing would see net debt climb to over 200 percent of GDP in 40 years, due to large starting deficits and an ageing population.

"Future Governments will face two basic options. They can either lift economic growth above current assumptions or they can cut spending and reduce public services. 

"This Government is focused on lifting our economic growth and we have a clear plan to do that.

"I remain confident about New Zealand's long-term future. We are coming out of the recession in a relatively strong position compared with many other countries.

"The task now is to unleash our real growth potential and ensure New Zealanders who lose jobs can find a new one as soon as possible," Mr English says.

The Shield is ours

I was so proud to be one of the more than 14,000 people who took part in the Invercargill street parade to celebrate the historic Ranfurly Shield win.

What a great way to congratulate the Southland Stags players, coaches and management for the Shield victory over Canterbury. It's been 50 years since we held the Shield and it's tremendous to have it back.

This is a fantastic result for the province and it will be a great boost for communities across Southland.

I've been following the Stag's progress closely throughout the season. To win the Shield, as well as make the Air New Zealand Cup semi-finals, is tremendous.

I am hoping we will be celebrating again in Southland this weekend, after the Stags meet Wellington in the Air New Zealand semi-final clash in the capital.

Day to remember: Southern National Party MPs Bill English and Eric Roy with Invercargill Mayor Tim Shadbolt.

Out and About

I shared a great day with 200 others for the opening of a new road sealing project in Kaka Point. Along with long-time Kaka Point identity, Mrs Rona Williamson, I cut the ribbon that signalled the completion of the sealing of an important link for both locals and tourists. The two roads covered are part of the Kaka Point loop of the Southern Scenic Route, connecting the township to the Owaka Highway and The Catlins.

The day ended at the Kaka Point Community Hall with speeches and afternoon tea and gave me the opportunity to talk to many people in this beautiful part of the electorate.

Queenstown office blessed

And from one beautiful area to another - I hosted a morning tea in Queenstown to celebrate the opening of my office at Frankton. Tare Bradshaw from the Hokonui Runanga performed a Mihi and blessed the office.

Honouring community volunteers

Volunteers are the "glue" that hold communities together. They are vital to the running of most organisations, schools, churches, fire brigades and sports teams. They often behind the scenes and with little or no fanfare so I was pleased to acknowledge their work when I hosted two further volunteer functions recently.

The first was at the Queenstown Senior Citizens Rooms and the second at the Winton Salvation Army.

Winton schools focus on values

While in Winton I visited St Thomas School, my old school and spoke to the senior pupils about values, leadership, strength of character and perseverance.

At Central Southland College I spoke at the launch of the school's mission and values statement. I also joined the pupils at Winton School for assembly. Values are something I was brought up with. People in the South appreciate values and strength of character and perseverance.

Boost for tourism

In Milford Sound, I had the pleasure of being guest speaker at the launch of Real Journey's new tourism boat MV Sinbad. This purpose-built monohull is being used for Nature Cruises in Milford Sound. Real Journeys does a tremendous job for tourism in Fiordland and the $2.5 million boat reflects the strong confidence the company has in the future prospects of the New Zealand tourism sector. The day was spectacular and I enjoyed catching up with innovative Southland people.

You can see photos of some of these visits on my website www.billenglish.co.nz

Trades Academy for Catlins

It is good news that Catlins Area School will be the base for one of five new Trades Academies set to open throughout the country in 2011.

Trades Academies are part of the Government's Youth Guarantee programme. They'll provide more career choices for 16- and 17-year-olds, and give them greater opportunities to develop their knowledge, skills and talents through trades and technology programmes.

The New Zealand Virtual School will be a pilot for an ICT-focused way of delivering industry-related education. It will provide distance learning to students throughout the country, and will broker work placements for students and hold trade camps once a year for students to receive face-to-face teaching and learning along with detailed career guidance.

The New Zealand Virtual School proposes to work with three other southern schools, a tertiary institution and several industry training organisations and industry partners. It will give students a head-start in an industry-related career, earning both NCEA credits and a tertiary qualification.

This Government is committed to bringing out the best in our young people. We want to see more students gain qualifications which will set them on a strong career path and help them achieve in their chosen field.

Warm up New Zealand

September was a record month for homes in Otago and Southland being retrofitted with insulation and clean heating under the Warm Up New Zealand: Heat Smart programme.

Figures for September show that 506 homes in the two provinces were retrofitted, giving a total figure of 1225 houses in Otago and Southland during the first three months of the programme. The Government scheme being delivered by Energy Efficiency and Conservation Authority (EECA) is proving a great success.

In Wellington:

The Government has been sitting in urgency to complete the passage of a number of bills before the end of the year.

Hunt for proceeds of crime

A team of specialist investigators is to be formed to hunt down and seize the millions of dollars in profits made by organised crime.

The new 22-strong Assets Recovery Unit will be at the sharp end of our fight against organised crime and methamphetamine.

The unit will support new laws giving police the power to detect and seize the assets and profits gangs and organised crime obtain illegally.

The proceeds will be used to fund methamphetamine rehabilitation and other initiatives that repair the damage organised crime has caused in our communities.

Levy on offenders to help victims

Among legislation passed under urgency was the Sentencing (Offender Levy) Act that helps address the financial and emotional costs that fall on victims of crime. It is part of the National-led Government's Action Plan on Violent Crime.

Convicted offenders will be levied $50 at sentencing with $13.6 million expected to be collected in the first four years to fund additional entitlements and services for victims of serious crime.

Eight new entitlements and services for victims will be funded by the levy. They will be implemented over the next nine months and include:

A significant increase in the funeral grant to families of homicide victims.

A daily court attendance grant of $124 a person for up to five adult members of a homicide victim's family.

An increase in the discretionary grant for families of homicide victims which are suffering financial difficulties, from $1500 to $5000.

A court service for victims of sexual violence which give them access to a trained adviser who understands the dynamics of sexual violence cases and the needs of victims

I'm confident these entitlements and services will make a real difference in the lives of victims of crime. I don't pretend we can take away the pain of victims' loss or injury, but we can help smooth the path to resolution.

I'm particularly pleased that every convicted offender will provide funding for these new services. It's important they contribute to addressing the harm their behaviour causes victims.

MMP referendum at 2011 election

National is honouring an election promise with the announcement of an MMP referendum. At the 2011 general election voters will be asked two questions - if they want to change the system, and what alternative voting system they would prefer.

If a majority of voters want a change, a further referendum will be held in 2014 asking voters if they prefer MMP or the alternative voting option that receives the most votes in 2011. The 2017 general election will be held under the alternative system if more people prefer that option.

After five parliamentary terms under MMP, it's important that New Zealanders get a chance to have their say about which electoral system they prefer. By holding the referendum at the same time as the 2011 election, the Government expects a higher voter turnout that more accurately reflected the public's views. I hope the people of Clutha-Southland take up this opportunity.

ETS Changes and Agriculture

This Government takes climate change seriously, and we are balancing our economic opportunities with our environmental responsibilities.

Our plans for the ETS, which are before a select committee, ensure we don't destroy peoples' jobs and the backbone of our economy by jeopardising the key agriculture sector. They defer agriculture to the more realistic timetable of 2015. The changes also encourage tree-planting by creating internationally valuable credits for forest owners.

Kind regards,

Bill English MP

The Office of the Auditor-General has today confirmed there are no grounds for an inquiry into any aspects of Finance Minister Bill English's housing arrangements.

It has also agreed that the rules and administrative processes for accommodation allowances need to be improved so they are clear and well explained.

The Auditor-General's conclusions, after considering all the issues, are largely predictable, Mr English says.

"I welcome the Auditor-General's confirmation that I correctly completed my declarations and provided other information as required to claim Wellington accommodation costs.

"Importantly, the Auditor-General concludes that the current parliamentary system is designed to establish whether an MP maintains a current residence outside Wellington, rather than where an MP lives in an everyday sense.

"This is consistent with rulings by successive Speakers of Parliament."

Mr English says the Auditor-General's decision puts an end to the issue - despite hollow and vindictive attempts by Labour to continue their smear campaign.

"I'm determined to continue focusing on the things that matter to this Government - helping Kiwis into jobs and managing the economic recovery.

"To that end, I took the personal decision last month to voluntarily repay all of the housing allowance I've received since the election. I'm now receiving no housing allowance - that's my decision."

Earlier this month, Mr English proactively referred all relevant material, including his family trust documents, to the Auditor-General.

After considering these documents, the Auditor-General notes that advice from the Registrar of Pecuniary Interests was that Mr English did not have a pecuniary interest under Parliament's rules. But it says wider criteria should have been applied for ministerial accommodation.

"More broadly, it says this illustrates differences in the accommodation systems for MPs and ministers - and the lack of fit between them.

"I'm pleased that the Auditor-General has endorsed the Prime Minister's changes to the ministerial accommodation system, which means that these issues won't arise in future.

"I also appreciate the support that Parliament has provided me as a long-term MP with a family.

"If critics are arguing that ministers working long hours in Wellington should not be allowed to live with their families, then they should come out and say so. That's not what I believe and it's not what the Auditor-General says."

Equity and fairness will guide the Government's consideration of the Tax Working Group's options for changes to the tax system, Finance Minister Bill English said today..

"The benefits must clearly outweigh any potential difficulties to warrant significant changes," he said in a speech to the Institute of Chartered Accountants in Auckland. "Equity and fairness will be key considerations, alongside benefits for the economy and for households."

The Tax Working Group, led by Victoria University's Centre for Accounting, Governance and Taxation Research, is taking a first principles look at the tax system. It is also considering how tax can contribute to economic growth based on exports, investment and sustainable jobs.

"The group is looking at proposals that, when taken together, are fiscally neutral," Mr English said. "The Government has a strong preference not to increase taxes to close the budget deficit. We prefer more efficient taxes over higher taxes.

"And, unlike other many other countries, we have no desire to increase the tax take."

The Tax Working Group is due to report in December and its options will be considered by the Government early next year, Mr English said.

New Zealand would also need to be mindful of international developments - particularly the Henry tax review in Australia.

"Australia is our largest trading partner, the source of much of our foreign investment and a destination that lures large numbers of Kiwi workers abroad, so we are keeping a close eye on developments.

"If the Henry Review results in Australia moving to lower its taxes, our own review will leave us well placed to consider options that maintain our international competitiveness."

Related document:
Tax speech Oct 17.pdf (pdf, 81 Kb)

Good afternoon and thank you. It is a pleasure to be here.

It's great to have the opportunity to explain the Government's economic plan and lay out some of the challenges we face - along with the role tax policy will play.

The Government has a very clear plan to increase our productivity, grow our exports and start narrowing the income gap with our trading partners. We're focused on what matters: jobs and growth.

Since the election, the economy has been the Government's top priority.

One of the main effects of the recession has been a big fall in forecast tax, putting pressure on Government spending and limiting policy options.

We are not alone. Governments around the world are facing the same pressures.

Wrestling debt under control will be the fate of many Western countries as they emerge from the current crisis. They will end up with smaller public services, lower pensions or increased taxes as a result.

New Zealand is better placed than many countries in determining how it responds. 

We don't want to go down the route of raising taxes. We are committed to a tax system that contributes to economic growth, is competitive internationally and helps New Zealand families get ahead.

As we emerge from the recession it is worth pausing to reflect on whether our tax system is as simple, fair, efficient and robust as it can be.

The fiscal and economic challenge

But first, it's important to understand the wider economic and fiscal environment in which we are considering our tax policy options.

Our current economic and fiscal challenges are more significant than we have seen for two or three generations.

The Government inherited a New Zealand economy that had gone into recession in early 2008 and was under considerable stress from imbalances built up over the past decade.

It's now clear that our economy started to get out of balance around 2003 - and it has since got progressively worse. Here's what I mean:

• Bank credit and household debt started blowing out

• Non-tradeables inflation took off and remained high at around 4 per cent

• Government spending ballooned - increasing by 50 per cent in the past five years - double the rate of economic growth and government revenue

• And since 2003, our productivity has sunk to a 25-year low.

Let me set out two indicators of our lopsided economy:

First the tradeables sector - that's exporters or industries competing with imports - has actually been in recession for five years, contracting by about 10 per cent in that time.

Even more staggering, there have been almost no net jobs created in the tradeables side of the economy for the past 10 years.

By contrast, the non-tradeables sector - domestic industries not competing with exports, including the Government - has grown by 15 per cent in the past five years.

The second symptom of New Zealand's unbalanced growth is the red ink in the Government's accounts - the result of fast-rising spending and falling revenue.

The Crown accounts for the year to June 30, 2009, released this week, illustrate the problems we face.

Revenue was $2 billion lower than in 2008, spending jumped by $7 billion and the operating deficit stretched to $10.5 billion - an almost $13 billion turnaround from the $2.4 billion surplus 2008.

We now face cash deficits of between $10 billion and $12 billion for each of the next four years. On current projections, we will not be back in budget surplus for a decade.

The recession has had a significant impact on the Government's books.

Over the four years from 2008, our total GDP will be permanently $50 billion lower than if the global financial crisis had not occurred. That means the Government will collect about $16 billion less tax revenue.

With expenses continuing to grow regardless, we will double government debt by 2014 - borrowing an average rate of $250 million every week for the next four years.

One of the consequences of issuing all of this debt is that the Government's finance costs will increase markedly.

In recent years, these costs have sat around $2.5 billion a year. Budget 2009 forecast finance costs to double to more than $5 billion a year by 2014 - roughly the combined amount spent on law and order and defence.

So these finance costs will compete directly with spending on more worthwhile public services.

It was entirely appropriate for the Government to increase its borrowing to cushion New Zealanders from the worst effects of the recession. We are doing this to maintain public services, preserve entitlements and prepare the economy for sustainable productive growth.

However, additional borrowing on this scale cannot continue indefinitely and the Government has taken steps to ensure the rising tide of debt is turned back.

Let me stress here that public finance cycles are long.

Net government debt rose steadily from the early 1970s and peaked at over 50 per cent of GDP in 1992. It then took another 16 years of near continuous growth to get it down and almost eliminate it by 2008.

So we can now expect it to take 20 to 30 years for the Government's finances to recover from the impact of this recession.

The Government's economic programme

Before I discuss our thinking about tax policy in more detail, I'd like to set out the Government's plan for dealing with these challenges and increasing New Zealand's economic performance.

It's important that tax policy is seen within this wider context.

We have identified six key drivers of our economic programme over the next three to five years:

• o The first area is reforming the regulatory environment and cutting away red tape getting in the way of business and productive investment.

Regulatory Reform Minister Rodney Hide has been extremely busy working with the Government to get this significant two-year review programme underway.

It includes the Overseas Investment Act, the Resource Management Act, the Building Act, the Holidays Act, electricity and telecommunications rules, and the emissions trading legislation.

• o The Government's second policy driver is significantly lifting the performance of the public sector, while reducing the rate of spending increases.

You will have heard a little about this from Revenue Minister Peter Dunne yesterday when he spoke about work being done to "Transform IR".

The public sector represents about 30 per cent of the economy, so it's essential that it plays its part, particularly with the Government's finances under pressure.

We've made it clear that we will improve both the efficiency and effectiveness of spending, while limiting the negative impacts of public policies on private enterprise.

• o The next area is investing in productive infrastructure.

The challenge here is quite simple. It is to ensure that the right level of investment is made in the right places by organisations with the knowledge and incentives to invest.

Earlier this year, we established the National Infrastructure Unit. One of its roles is producing the first National Infrastructure Plan by early next year - a stock take of current demands and investment programmes which will become the focal point for industry co-operation.

The impact of the Government's programme on infrastructure investment is already evident. We are investing $7.5 billion over the next five years to build and upgrade schools, roads, housing, hospitals and telecommunications.

• o The Government's fourth policy driver is education and skills. There are several parts to the Government's focus in this important area.

The first is literacy and numeracy at primary schools, driven by National Standards, which will set clear expectations, measure children's progress against those expectations and report their progress to parents in plain English.

The second area is providing options for secondary-age students outside the traditional school system.

• o The Government's fifth policy driver is innovation and business assistance. This covers government and business investment in research and development, in innovation, and in developing new markets and products.

Our considerable investment in this area will help firms connect with overseas markets and consumers; as well as help them develop new ideas to create new and higher value products and services.

Those goals will help drive productivity growth and investment in the tradeables sector, and improve our export performance.

• o Finally, let me turn to taxation - the sixth focus of the Government's economic policy agenda for the next three to five years - and no doubt the area you are keen to hear about today.

Taxation is one of our six policy drivers because of the pervasive influence it has on both the economy at large and on decisions made by individuals.

As we have said, New Zealand needs to lift its economic growth.

That's all the more important with 60,000 people now on the unemployment benefit and with unemployment likely to continue rising well into next year.

We also need to increase household incomes so they can save, repay debt and, from the Government's perspective, so it can get back to budget surpluses sooner.

This Government sees a simple, fair and efficient tax system that encourages New Zealand families to get ahead under their own steam as one of the key drivers of economic growth.

Ideally, the tax system should impose the minimum cost necessary to get the revenue needed for vital frontline services and to support the most vulnerable.

That means it should be simple to administer, easy to comply with and not drive behaviour and investment decisions.

It should also provide the right incentives - allowing people to keep more of their own money encourages them to invest time and effort into improving their skills so they can earn more. This also has a productivity benefit for the economy.

In addition, the system should be fair - most forms of income should be covered and where possible loopholes that allow the sheltering of income to avoid tax should be closed.

Lastly, our tax system must be internationally competitive - New Zealand with its small population and capital markets needs to attract skilled workers and encourage people to invest here.

And if our economy is to thrive, we need to ensure our best and brightest have good reasons to stay.

It is no secret we have one of the most internationally mobile labour forces in the OECD, with huge numbers of Kiwis living overseas, the second highest proportion of expats after Ireland and strong migrant flows.

In short, we rely on high levels of inward migration and investment. 

The tax system should help New Zealand attract and retain the people, businesses and investment it needs.

Until recently, the relative simplicity of the New Zealand tax system was one of its strengths. However, it has become increasingly complicated.

Tax Working Group

Earlier this year, the Minister of Revenue and I announced the establishment of a Tax Working Group, led by Victoria University's Centre for Accounting, Governance and Taxation Research to review our tax system.

The aim was to take a first principles look at the system and see how it could be improved - and in recent months the working group has set out some of its ideas in a series of public papers.

The working group is looking at proposals that, when taken together, are fiscally neutral. The Government has a strong preference not to increase taxes to close the deficit. We prefer more efficient taxes over higher taxes.

And, unlike many other countries, we have no desire to increase the tax take.

Some of the challenges the Tax Working Group is considering are:

• Whether the efficiency and integrity of the tax system could be improved through changes to the tax mix. This will include consideration of the Government's30/30/30 tax goal, and challenges associated with this in the current environment.

• Whether the tax base could be broadened so we are less reliant on personal and corporate tax.

• Whether changes to the tax mix could tilt the playing field away from borrowing and spending towards exports, investment and sustainable jobs.

• How we could simplify the tax system to reduce compliance costs and make it as easy as possible to administer.

I'd like to take this opportunity to commend the Tax Working Group's work to date. The calibre of its experts - drawn from government, academia and the private sector - is extremely high. So far it has tackled its brief with clarity and rigour.

The group's work is also extremely timely. Across the Tasman the Australians are conducting a review of their own tax system, led by the Secretary to the Treasury, Ken Henry.

Australia is our largest trading partner, the source of much of our foreign investment and a destination that lures large numbers of Kiwi workers abroad, so we are keeping a close eye on developments.

If the Henry review results in Australia moving to lower its taxes, our own review will leave us well placed to consider options that maintain our international competitiveness.

So I look forward to receiving the Tax Working Group's report in December. We will consider its findings in the New Year and any changes will be signalled in Budget 2010.

The benefits must clearly outweigh any potential difficulties to warrant significant changes.

Let me be clear, equity and fairness will be key considerations, alongside benefits for the economy and for households.

The Tax Working Group's papers on property-related taxes have generated a lot of public debate.

And so too has the idea of increasing GST to provide revenue for personal tax cuts. The main issue here is fairness - low income earners, in particular, would have to be compensated for any increase in GST.

There are arguments for and against these ideas and I'm happy for the working group to consider them. As a Government, we welcome debate, but we must be practical and realistic.

As Prime Minister John Key and I have both stated previously: the Tax Working Group will have to come up with some fairly compelling reasons to convince us of the overall benefits of further property-related taxes or an increase in GST.

High marginal tax rates

The working group has raised a number of issues in its papers released so far. One of them is our internationally high marginal tax rates.

An average wage earner with children loses over half of every extra dollar they earn, once our high top tax rates and the abatement of Working for Families tax credits are taken into account.

This puts us in the bottom half of the 30 OECD countries on this measure. In the UK, France and Japan, the same worker would get to keep far more of every extra dollar earned.

Getting to keep less than half of what they earn is hardly an incentive for people to aspire to higher incomes.

In New Zealand the top rate of 38c starts at just $70,000 - about 1.5 times the average wage. This is much lower than the OECD average, which is about 2.4 times the average wage.

In Australia the top rate at 45c is higher but you need to earn over A$180,000 to pay it, while in the US the top rate is about 40 per cent, but you need to earn about NZ$340,000 before you pay it.

Differential tax rates and income support like Working for Families and student allowances create big incentives for people to minimise their "taxable income". 

This is amply illustrated by the 9700 high-income families with rental properties, who last year claimed tax losses, enhancing their eligibility for Working for Families payments.

A case can also be made that a wide gap between the corporate and the top personal rates provides incentives to use the company structure to avoid the top personal rates. 

A key issue here is the overall credibility of the system. Large scale legitimate avoidance behaviour by higher income earners undermines the goodwill of lower income earners.

It's quite telling that there has been virtually no growth in the number of people paying tax on $1 million of annual income since the 39 cent top personal tax rate was introduced 10 years ago.

We don't want people spending their time and resources trying to avoid tax. Equally we also don't want IRD devoting all its time to chasing tax and compliance issues. 

As a country, we want families, businesses, accountants and lawyers looking at how to unlock greater income and productivity, not working out how to minimise their tax.

I'm pleased to see the New Zealand Institute of Chartered Accountants and Tax Management New Zealand proactively looking at how the tax system for small businesses could be simplified to reduce compliance costs.

They have set out two proposals:

One is for micro businesses earning under $60,000 a year and not registered for GST to pay a final tax of 15 per cent based on turnover.

The other proposal is for businesses with annual turnover of less than $1.2 million to have their income tax calculated on a cash basis, based on their GST return.

I understand that a final report will be submitted to the Government next year for our consideration, after consultation with the SME sector.

I believe these proposals have merit and they will not be dismissed out of hand. Tax policy officials will engage with the Institute on them.   

Examining the tax mix

Another area the Tax Working Group is considering is the tax mix.

As a country, New Zealand relies heavily on the taxes that are most damaging to growth - income and corporate taxes. Nearly 60 per cent of our revenue comes from these two sources.

Here are some facts worth considering:

• In 2000 around 5 per cent of wage earners paid the top personal tax rate. In 2009 this has climbed to 9 per cent and it is expected to reach 25 per cent in 10 years.

• We collect the third highest ratio of corporate tax to GDP in the OECD.

At the same time, distortions are created by the things we do not tax.

Most people would see it as unfair, for example, that speculators can reap large tax-free gains while low and middle income workers are taxed on every dollar they earn.

Inland Revenue has published data showing that last year the losses claimed by people with rental properties were $575 million more than the income declared from residential rentals.

The net reduction in Government revenue was approximately $150 million, while the capital value of this asset class roughly doubled.

This is a recent trend. In 1999 rental properties generated over $600 million in taxable income.

Industries like farming, manufacturing and tourism, are vital to providing sustainable jobs as we come out of the recession.

However, in recent years, large increases in property values have contributed to high interest rates for these sectors.

Those higher interest rates, in turn, push up our dollar, reducing exporters' margins and making it more expensive for businesses to borrow. Again, this cycle harms our productive industries.

Conclusion

Can I finish by reiterating that the Government is clear about what needs to be done to turn this economy around. We have a balanced, targeted and effective plan to achieve that.

However we need to make sure we get the kind of recovery we want - one that will create sustainable jobs and growth.

Despite our considerable economic challenges, I'm confident about New Zealand's prospects because of the resilience demonstrated by many New Zealanders.  We are seeing early signs of recovery, which I welcome.

By backing ourselves as a country, we have a real opportunity to emerge from the recession stronger and more competitive than other countries.

Thank you.

The combined impact of significant extra spending and the recession are highlighted in the Government's annual accounts for the year to June 30, Finance Minister Bill English says.

"There has been a marked deterioration in the Crown's accounts, from an annual operating surplus of $2.4 billion in 2008 to an operating deficit of $10.5 billion in the year to June 30 2009," he says.

"The deficit is larger than the $9.3 billion forecast in the Budget in May, as tax receipts fell, spending increased sharply and a number of the Crown's investment portfolios sustained significant losses.

"We cannot afford for these trends to continue indefinitely," Mr English says.

Faced with expected cash deficits of between $10 billion and $12 billion over each of the next four years, Mr English says the Government expects to have to double Crown debt by 2013.

"We will be borrowing about $40 billion in the next four years, to maintain public services and welfare entitlements, and to invest in productive infrastructure and support jobs.

"This extra debt will increase the Crown's interest costs by about $700 million each year - preventing this money being spent in more worthwhile areas.

"That means by 2013, total Crown interest costs are forecast to top $5.4 billion a year - more than the combined annual spending on law and order and defence.

"This underlines the need for us to get our books in order as soon as possible - because budget surpluses give us choices. Deficits do not," Mr English says.

Finance Minister Bill English leaves for Hong Kong and London this Sunday to raise New Zealand's profile with investors and business groups, and to share ideas about the next steps in economic recovery.

The six-day trip follows a similar visit to Tokyo and New York last month.

"It's important that we are talking directly to these groups in the world's financial capitals, with the Government needing to borrow about $40 billion over the next four years," Mr English says.

"I also want to get a better feel for the growth prospects in these economies - particularly how they are moving out of the recession stimulus phase and into economic recovery mode."

During his two days in Hong Kong, Mr English will call on Hong Kong Monetary Authority Chief Executive Norman Chan and Hong Kong SAR Chief Secretary for Administration Henry Tang.

He will also speak to the New Zealand Chambers of Commerce in Hong Kong and meet investors.

In London, Mr English will meet British Chancellor of the Exchequer Alistair Darling, and speak to businesses and investor groups.

"As I did during my visit to Japan and the United States last month, I'll be reminding investors that New Zealand's economic fundamentals are sound and that we are well positioned to come out of the recession ahead of many other countries," Mr English says.