Government urged to consider capital gains tax for fiscal balance

Housing affordability one of the issues raised

Government urged to consider capital gains tax for fiscal balance

In a briefing to Finance Minister Nicola Willis, Treasury stressed the need for New Zealand to address its structural fiscal challenges, including the absence of a capital gains tax, to achieve budgetary equilibrium.

As outlined in its presentation to the incoming minister, Treasury underscored the importance of macroeconomic and fiscal prudence in the upcoming year, noting that while New Zealand’s debt remained comparatively low on a global scale, it has increased significantly in recent years, surpassing current revenues.

It said, “A substantial fiscal consolidation is required to bring revenue and expenses back into balance and support fiscal sustainability, while also supporting monetary policy to bring inflation back into the target range,” Stuff reported.

The government, the Treasury said, should focus on achieving a surplus by no later than the 2026/2027 fiscal year through measures such as curbing new spending, reducing current expenditures, and increasing revenue.

Moreover, Treasury stressed the importance of simultaneously fostering economic growth, resilience, and living standards while addressing fiscal challenges. It noted that although New Zealand has shown resilience in its recovery from the COVID-19 pandemic, the government’s debt accumulation rate exceeds that of many other nations.

“Between 2019 and 2023, the IMF estimates that New Zealand’s government net debt increased by 18% of GDP, compared with a 4% increase for the average advanced economy,” it said. “The fiscal impacts of the North Island weather events have added to debt in 2023 and will continue to do so over coming years.”

One of the key issues identified by Treasury is New Zealand’s reliance on personal tax as a primary revenue source. Fiscal drag, driven by inflation-induced income growth pushing people into higher tax brackets, has bolstered tax revenue but has also led to increasing pressures on the personal tax system, Stuff reported.

This arises from the disparity between personal and corporate tax rates, as well as the absence of taxation on capital and capital gains.

“These limit options to raise revenue, alter the mix of taxes, or make changes that would meet distributional and economic objectives,” Treasury said. “The lack of a comprehensive capital gains tax restricts the ability to manage gaps between company rates and personal rates and increases costs of income taxation. It has also contributed to higher house prices.”

It argued that addressing these structural issues, including the implementation of a comprehensive capital gains tax, is imperative for achieving fiscal sustainability, efficiency, and fairness.

The briefing stressed the importance of early planning for major tax changes, given their time-intensive nature. While acknowledging the limited availability of “low-hanging fruit” in terms of revenue-raising options, Treasury urged the exploration of policies that align with distributional and economic performance objectives.

Treasury also pointed out the critical need to address housing affordability, citing its impact on household indebtedness, macroeconomic stability, and social outcomes. It identified low interest rates, urban expansion restrictions, and tax treatment of housing capital gains as key drivers of housing market dynamics.

Low rental affordability contributes to high demand for government housing supports, with over $5 billion spent on support and other initiatives per year,” it said. “Unaffordable and unhealthy homes also have wider social impacts, including on health and education outcomes.”

Click here to access the Stuff report.

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