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Debate continues on eve of tax reforms

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Fuseworks Media
Fuseworks Media

There will be immediate gains for most when the Government's tax reform package takes effect tomorrow, but the extent of those gains in the wider scheme of things remains open for debate. Chris Ormond of NZPA reports.

Wellington, Sept 30 NZPA - The Government's "GST-income tax switch" will from tomorrow leave the vast majority of income earners with at least a few more dollars in their pockets each week.

Income tax cuts are across the board and will be implemented alongside an increase in GST from 12.5 to 15 percent.

Finance Minister Bill English said the reforms, the most significant in nearly 25 years, would at all taxable levels more than offset the GST increases, and that "proportionate increases" in disposable income would be the same for earners across the board.

Those using the taxguide.govt.nz calculator will find a $30,000 wage equates to a net weekly gain of $5.29, while someone on $120,000 will be $52.78 better off.

The changes will come as a boost for families and help strengthen economic growth, Mr English said. "This has never been a lolly scramble.

"New Zealanders will benefit immediately from tax cuts and they will benefit more over time from the lift in growth and jobs this package will create."

The Government maintains the package is part of its goal to encourage savings, investment and exports, and move away from a collective tendency to borrow, consume and over-invest in housing.

David Kneebone, manager for Retirement Commission website sorted.org.nz, said while the gains for some people would seem small, it was important they recognised exactly what they were getting and made an effort to utilise it.

"It can get chewed up really easily. The choice is; do you want to be one of those people who just fritters it, or do you want to get in control and do something with it," he told NZPA.

For those hit by recent increases to the price of cigarettes, car registrations and the like, tax gains might bring them back to where they were beforehand.

"But for others it's a good opportunity to consider paying high interest debt, maybe think about opening something like KiwiSaver if you're a salary earner and can contribute 2 percent of your income, or increase mortgage payments."

He said adding $10 to $20 to each mortgage payment could make a considerable difference to the time it took to pay it off, and the amount of interest paid.

If people didn't have debt and didn't see KiwiSaver as an appropriate option, they could consider putting small amounts aside for Christmas or the next school year. "We are asking people to be aware -- and don't fritter it."

Labour leader Phil Goff this week announced a party policy to axe GST on fresh fruit and vegetables and began a nation-wide "cost of living" campaign.

He has led a Labour Party charge to publicise the plight of lower income earners and told NZPA his point was that a string of rises in the cost of living in recent months meant many would still be going backwards after tomorrow, while a smaller percentage of higher earners would reap the bulk of the extra tax-free money.

He talked about rising rent prices in Auckland, a spike in petrol prices, increased ACC levies, extra costs resulting from the Emissions Trading Scheme coming into effect and climbing rates bills. "And more than half of New Zealanders didn't get a wage rise last year according to the Department of Labour."

Mr Goff said his travels this week had also given him an insight into how retailers were coping.

"They all say the same thing -- that people are spending less, that working people don't have money in their pockets, that they are experiencing the worst period for retailing in their memory.

"This is a year after John Key promised New Zealand would be coming aggressively out of recession."

The people who needed to spend more -- those at the bottom -- would get a small increase from tomorrow, whereas the those at the other end of the spectrum would get a decent lump of extra cash. "How can that be fair?"

Mr Goff said retailers were also feeling the logistical costs of implementing GST changes and in many cases had indicated they would have to show restraint in putting prices up so as to stay competitive during challenging times.

There have been concerns expressed about retailers using the GST change to round prices up above the actual percentage increase, but Mr Goff said those serving the higher income end of the community were likely to be the only ones considering that.

Mr English said the tax reforms were "the next step in the Government's wider programme to get the economy growing faster", and Treasury had estimated the tax changes would add about 1 percent to economic growth over the next few years.

He and party colleagues have accused Mr Goff of clutching at straws in trying to discredit the reforms.

"If Labour really believed New Zealanders will be worse off it would promise to reverse the changes," he said. "That fact that it hasn't speaks volumes."

The latest forecast from independent outfit, the New Zealand Institute of Economic Research, said the unemployment rate had stabilised, but was not expected to improve until 2012.

It said consumer price inflation would spike due to GST and other policy changes, peaking at 4.7 percent in March next year.

Personal tax cuts would compensate households for one-off price increases, but general inflationary pressures would erode 80 to 90 percent of wage gains over the next two years.

* From tomorrow, all personal income rates will be cut to varying extents, secondary tax and resident withholding tax rates will be cut, along with tax on portfolio investment entity (PIE) investment savings. GST will go from 12.5 to 15 percent and those getting government benefits or superannuation will have payments increased to offset that.

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