National has promised no new taxes if it returns to government, but with New Zealand owing $222 billion and still spending more than it earns, can the numbers actually stack up? In this recent episode of Cheques and Balances, Lighthouse Financial Managing Director Matt Harris joined James and Mike to unpack what no new taxes could mean for the economy, where the Government could find the money instead, and how the alternative tax policies on the table could affect Kiwis.
No New Taxes, So Where Does the Money Come From?
National’s no new taxes promise sounds appealing, particularly when Kiwis are already paying tax at multiple points across their income, savings and investments.
But there’s an obvious problem: the Government still needs to get its books back towards surplus.
As Matt explained, there are only a few levers available. New Zealand can spend less, borrow more, collect more tax or grow the economy.
With new taxes ruled out under National’s current position, spending and economic growth become particularly important.
Cutting expenditure is possible, although Matt pointed to healthcare and education as areas where reducing spending becomes more difficult. That leaves economic growth as a major part of the equation.
A growing, more productive economy naturally generates more tax. More people working and businesses succeeding can mean more income tax, PAYE and GST flowing back to the Government without introducing another tax.
Michael made an important distinction here. Economic growth doesn’t necessarily mean simply increasing New Zealand’s population.
Bringing more people into the country can increase economic activity, but it also brings infrastructure costs. Roads need to be widened, and services expanded to accommodate a larger population.
Increasing productivity is different. If New Zealand can produce more and create greater economic activity from the resources it already has, the tax take can grow alongside the economy.
Is ‘No New Taxes’ Really That Simple?
The headline no new taxes is easy to understand. What sits underneath it is more complicated.
Not introducing a new tax doesn’t necessarily mean existing taxes, rates or levies won’t change. James highlighted petrol levies as one example of an existing cost that could still increase.
Matt also pointed to tax changes introduced at the end of Labour’s previous term that National allowed to take effect, including the increase in the trustee tax rate to 39% and GST changes applying to certain online platforms.
So while National may be promising not to introduce another tax, that doesn’t mean the tax system itself will remain unchanged.
There was also some debate over whether the simplicity of the announcement is a strength or a weakness.
For Matt, the announcement initially felt light on detail. He would rather see greater clarity around exactly how National plans to reduce costs or stimulate the economic growth required to make the promise work.
The underlying idea may be to spend less and grow more. The challenge is turning that into policy.
Growing the Pie Rather Than Dividing It
Much of the debate comes down to what kind of economy New Zealand wants to create.
Can we generate more revenue by growing businesses, increasing employment and improving productivity? Or do we collect more from the existing economy?
Matt argued for the former: a New Zealand that is productive, growing and encourages people and businesses to succeed.
That doesn’t make the solution easy.
Growing the economy enough to generate meaningful additional tax revenue requires businesses to perform, people to remain employed and productivity to improve.
But if National wants to maintain its position on new taxes while moving the Government towards a surplus, economic growth is likely to play a significant role.
What Could a Change of Government Mean for Tax?
The alternative presents a very different tax conversation.
Labour has committed to introducing a capital gains tax, while several other taxes have been proposed by parties it may need support from to form a government.
Policies discussed during the episode included:
- Capital gains tax
- Wealth tax
- Inheritance tax
- Higher corporate tax
- Bank levy
- Higher top income tax rate
- Tax on profits sent offshore by large technology companies
- Land value tax
Importantly, these are not all Labour policies, nor does their proposal mean they would all become law.
What they do illustrate is the significant difference between the tax policies that could potentially be negotiated depending on the makeup of the next Government.
The Unintended Consequences of Tax Changes
How much revenue a tax raises is only part of the equation. The other question is how people change their behaviour because of it.
Take a bank levy.
While the bank may technically receive the tax bill, Michael argued that the cost could ultimately make its way back to customers through pricing over time.
Property provides another example.
Matt pointed to the previous removal of interest deductibility for property investors. Increasing the cost of owning a rental left investors with several options: absorb the cost, increase rent where possible, or sell.
The different treatment of new builds also influenced where investors put their money, with investors moving towards new-build properties that received more favourable treatment.
When those rules change, behaviour can change with them.
It’s why tax policy needs to be considered beyond the amount of money it could initially bring into Government coffers.
What Would Labour’s Capital Gains Tax Look Like?
Labour’s proposed capital gains tax would apply a 28% tax to gains from investment property from mid-2027.
The family home, farms, KiwiSaver and shares would be exempt.
Labour expects the tax to raise an average of $700 million per year, with forecast revenue reaching $1.35 billion by 2030. That revenue would help fund health policies, including three free GP visits each year.
Matt is fundamentally opposed to taxing capital.
His argument is that the money used to purchase an investment has typically already been taxed before it reaches the asset. Taxing its passive capital growth adds another layer of tax, reducing the eventual return for the investor.
That becomes particularly relevant when those assets are being accumulated to fund retirement.
There is also the question of what investors do differently once a capital gains tax exists.
If gains on an investment property are taxed while gains on the family home are exempt, some people may decide to put more of their wealth into their own home instead.
As Matt put it, rather than owning several rental properties, an investor could choose to own a significantly more expensive family home and have its capital gain remain exempt.
That may also have implications for the supply of rental accommodation if fewer investors choose to own rental properties.
What About Business Owners?
Matt also raised concerns about what taxing capital could mean for business owners.
Building a business often means sacrificing income opportunities and, perhaps more importantly, significant amounts of time.
For owners who eventually build something valuable enough to sell, a tax on that capital gain changes the return they receive after years of building the business.
For Matt, that sits uncomfortably alongside the goal of creating a more productive economy.
If New Zealand wants people to build businesses, invest and create economic growth, the question is whether increasing the tax applied to the value they create encourages or discourages that behaviour.
Tax More, Spend Less, Borrow More or Grow?
Whichever side forms the next Government faces the same underlying financial challenge.
There are only so many places the money can come from.
New Zealand can tax more, spend less, borrow more or grow the economy.
National’s no new taxes promise puts greater emphasis on controlling spending and generating enough economic growth to increase Government revenue.
The alternative policies put greater emphasis on collecting additional revenue through changes to the tax system.
Neither happens in isolation. Tax changes influence behaviour, spending cuts have consequences, borrowing has a cost, and economic growth is easier to promise than to deliver.
As election year heats up, the real question isn’t simply whether Kiwis want more or fewer taxes. It’s which combination gives New Zealand the best chance of improving its financial position while building the kind of economy we want to live in.
Key Takeaways
- National has promised no new taxes, while New Zealand currently owes $222 billion and continues to spend more than it earns.
- Without additional taxes, reducing Government spending and growing the economy become increasingly important.
- Economic growth through greater productivity is different from simply increasing the population, which can also increase infrastructure costs.
- A promise of “no new taxes” doesn’t necessarily prevent changes to existing taxes, rates or levies.
- Labour’s proposed capital gains tax would apply a 28% tax to gains from investment property from mid-2027, while the family home, farms, KiwiSaver and shares would be exempt.
- Labour expects the tax to raise an average of $700 million annually, with forecast revenue reaching $1.35 billion by 2030.
- Matt Harris raised concerns about how a capital gains tax could influence property investment, retirement planning and the incentives facing business owners.
- Tax policies can create unintended consequences as investors, businesses and consumers adjust their behaviour.
- Ultimately, the Government has four broad levers available: tax more, spend less, borrow more or grow the economy.
Next Steps
Not sure how changing tax policy could affect you, your property or your business? Get in touch with the Lighthouse Accounting team to understand what it could mean for your financial position.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
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