Estimates Debate — Revenue

Members, the time has come for us to relieve the Minister of Police of his seat and replace him with the Minister of Revenue.

Thank you, Mr Chair. Look, it’s a real privilege to stand and introduce these thoughts and on behalf of our Finance and Expenditure Committee chair, Barbara Edmonds.

Our committee turned our minds, with Vote Revenue, to how the Government’s refresh of fiscal strategy would promote a stable economy and also sustainable debt levels. It was also important for us to know how the approach of Vote Revenue is consistent or not with the operating balance. We note in our report that nominal GDP is climbing and tax relief measures are continuing to decline. Therefore, tax revenue for the 2024-25 forecast will grow significantly from $105 billion to $123 billion. And I would note that that actually gets us back into surplus in the 2024 fiscal year, which is about a year quicker than National did after the global financial crisis.

Now, the Minister spoke to us about a busy ministry. It was busy dealing with COVID-19 and support for small business, including the cash-flow scheme—$2.27 billion was paid out to 128,000 customers and $455 million of that has been repaid so far. The Minister also told us about the IRD’s own Business Transformation Programme and we wanted to know whether it was meeting its objectives of modernisation and simplification. We heard that in May this year, the IRD annual run of income tax assessments went through 2.5 million automatic assessments and that $613 million was refunded, which was an enormous change compared with what used to be possible under the old technology.

Another thing keeping the ministry busy has been changes to policy. So we heard about increased disclosures for domestic trusts to support the integrity of the new top tax rate; ongoing work on the new interest limitation for residential property; a big deal of work on the cost of living payments—$350 per week for earners up to $70,000 who weren’t eligible for the winter energy payment; the new child support policy change that will impact 41,500 sole parent families next year; but also work on getting more data on the wealthiest households—so understanding what the effective tax rate being paid is. We heard that New Zealand has some of the best data in the world on wages and salaries, but poor information on irregular capital income. And we do note that the Minister said categorically the ministry was doing no work nor had plans to do work on any new taxes.

We interrogated questions around bracket creep and heard that data on irregular capital income is likely to be more useful in terms of Government income and also equity, and the four principles were discussed—horizontal and vertical equity, efficiency for the Government and taxpayers, and that whatever is done should minimise distortions. We heard that automatically adjusting for bracket creep during a pandemic would make responding more clumsy and that the Tax Working Group had not recommended such changes because of the unpredictable nature of external events, exactly like we’ve seen with COVID and then the war in Ukraine. The Minister also mentioned that the drivers are correct as they are. For example, unemployment is at a record 3.3 percent against expectations that it could reach above 10 percent. So he offered that as an explanation for saying that bracket creep was something that was already being managed correctly with the right drivers.

We also heard that the temporary loss carry-back scheme for business during COVID would have big fiscal implications, but that could be considered in the event of another significant shock. When it came to the cost of living payment, there were questions asked around the bureaucracy that was involved to administer those. The Minister made the point that the 300 short-term staff employed in the short term needs to be considered in the context of staff levels being at 6,000, five years ago, to 4,000 IRD staff currently. And we also heard that the payment is a short, immediate response and, therefore, looking at bringing it into the long term was not something that was being considered—that the cost of living issues were happening now. In considering this, the committee considered also the context of the COVID pandemic, the overseas pressures such as the war in Ukraine, and that debt levels coming out of that for New Zealand are projected to be half that of Australia and a third of that in the UK.

And the final comment really was that the Minister gave very sincere thanks to the IRD and the Ministry of Social Development and spoke at length about how they’d worked hard together to be able to get money out the door to New Zealanders at a time of crisis. I think that’s a sentiment that is shared by our committee, and so we would like to add our thanks to that of the Minister. Thank you.

Well, thank you very much, Mr Chair. My question is very simple. Does the Minister accept that removing mortgage interest deductibility from landlords will increase their tax bill, and in a tight rental market that extra tax cost will, at least in part, be passed on to tenants?

Thank you to the member for that question. The link between effective interest rates and rents is by no means an arithmetic one, as evidenced by the fact that when interest rates in recent years declined markedly as world interest rates declined, rents didn’t drop.

Is the Minister saying he doesn’t believe that increasing the taxes on landlords will increase tenants’ rents?

I’m saying that the idea that the member promotes that there is a direct relationship between the two is not made out.

Can he tell tenants that they will not see their rents increase because their landlords are now paying more tax due to the loss of mortgage interest deductibility?

Well, there’s no universal truths that run throughout the country in the same place, at the same rate, and in all places. But the answer to control of rents is the supply of new dwellings. New-dwelling builds in Auckland are, of course, double what they were when we took Government. As a consequence of the increases in supply—I might be out by a fraction of 1 percent—I think rent increases in the last year for which we have data, in Auckland, were two-point-something percent—I forget the point, whatever it is—which proves, in my view, that rents are more often related to the marginal cost of new supply, and the marginal cost of new supply is, of course, generally in new builds, and the effective cost of those new builds is not going up, because they still have interest deductibility.

Is he satisfied with the administration of the first tranche of cost of living payments on 1 August, and, if not, can he detail for the committee what improvements he has made to the administration of cost of living payments since 1 August and what results those improvements will have for the people receiving the payments and for the taxpayers who are paying for the whole thing?

As has already been well traversed in question time over a number of days in this House, the Government faced a choice. Given that we wanted to give some extra support to people who were facing cost of living pressures—bearing in mind that we were already assisting with decreases in road-user charges and excise duty on petrol as well as our halving of public transport fares—we thought something additional was necessary. One of the criticisms that’s been made by Opposition parties is that most of the support that the Government has offered through the likes of the winter energy payment has gone to households in receipt of Government transfers. We thought there was something in that, and we wanted to give some income support to modest to middle income earners who weren’t in receipt of Government assistance.

So we proposed a payment that was paid in three tranches each of about $116, and we were then faced with a choice as to what process we ran around that. Would we run an application process, or would we pay on the basis of set criteria? We were advised and accepted the advice from Inland Revenue that you couldn’t run an application process within that period, and also that an application process would cost a lot of money relative to the amount that was being paid out and it would also result in a lower rate of uptake because some of the people who were entitled to it wouldn’t know that and wouldn’t apply. So we chose instead to use a system based on pre-set criteria—which have been traversed previously and I won’t detail that and take up too much time—and have paid out on the basis of those.

I have said previously that I think that will be, roughly, 99 percent accurate and that the cost of using a more accurate system which relied upon applications and assessment on a case by case basis would have both not met the requirements of getting the money out the door but would have cost more money than has been saved. Am I satisfied that the outcome of that has been as we intended? Yes. Have there been instances that we would prefer not to have occurred? Yes, but the only alternative to that was an application scheme.

Can the Minister rule out the Government’s extending the cost of living payment beyond the first three months of payment on the first day of August, September, and October, or will this policy be extended, just as the discounts on road-user charges, fuel excise tax, and public transport have already been extended twice?

We have no current intention of extending it. I have no policy—

💬 David Seymour: Can he rule it out?

Well, you can never prove a negative. So there is no positive intention to extend it, we have no work under way to extend it, and I am not party to any discussions with any Minister for it to be extended, and were there contemplation of that, I would expect that those discussions would have commenced by now. So I can pretty much give the member the affirmation that he wants.

Staying on the same topic, and I don’t mean to ruin the party, but I must say, you know, the observation is that this cost of living payment has been a spectacular failure by this Government. I guess the reference that I want to quote as context before I get into my questions in regards to this payment is that the Treasury recommended caution with progressing such a significant policy in accelerated time frames as there are significant risks associated with designing this proposal at speed. And they went to on to say that “This payment, in terms of being broad-based, is not going to be able to provide the benefit or support to those that are struggling the most.”

My questions to the Minister are quite simple—and we’ve traversed this throughout the Chamber, that various people overseas have received this payment. We know British lawyers and dead people and people in China who have not lived in New Zealand for over 22 years have also got the payment. But my question to the Minister is quite simple: isn’t this an embarrassing example of either poor execution from IRD or poor policy design by this Government? So I’d be interested in his perspective on that.

Secondly, in regards to that, despite this payment being there—I remember the night when we stood here pushing and ramming through that legislation under urgency, and raising these questions in the committee of the whole House stage and just, you know, getting the smile but no answers of substance. Despite promising to pay over 2 million Kiwis this payment, around 800,000 people have not received it. So my question, quite simply, to the Minister is: is this fair?

The last question I want to ask is: does he stand by their statement that there is nothing to investigate, when this policy, as he’s just quoted, has led to over 1 percent of ineligible people receiving that $350 payment?

Well, responding to the member’s assertion that the Treasury was saying that support would be better given to people who need it more, in Government we believe that we have done the best by people on low incomes. We’ve increased benefits twice. We have also pegged benefit increases to the higher of inflation or wage growth so that they don’t fall back as a proportion of working people’s incomes, which they have for many years in New Zealand. We’ve introduced the winter energy payment—superannuitants get that, as well as all main beneficiary-class categories. So we thought that we were already doing the right thing by those people, together with the transport-related initiatives that I’ve already traversed. So, in our opinion, we actually disagreed with the Opposition, and sometimes with the Treasury, as to whether there should be some targeted assistance that was short term in the low to middle income grouping, people earning up to $70,000 in the year ended 31 March 2022.

Now, we know that not everyone agrees with that prescription and that other people, such as that member’s party, have preferred tax policies which would give huge tax cuts of many thousands of dollars a year and, indeed, to a highly paid CEO earning more than $200,000 a year, by reducing the tax rate on their incomes over $180,000 from 39c to 33c. I also know that you would restore interest deductibility for landlords in a way that would benefit overseas landlords and effectively reduce the tax they pay in a way that puts the occasional payment under our cost of living payment well into context.

How much revenue did the 39c tax rate raise over and above what would have been raised by a top tax rate of 33c in the last financial year?

I’m interested now to move to a conversation around IRD’s annual report in 2021, around tax debt—specifically, the increase in tax debt in the region of 41 percent. We’ve seen an increase from $3.1 billion in 2018 to nearly $4.4 billion now, and the number of people receiving remissions or write-offs from tax debtors has soared: nearly a fourfold increase in the year ended to June 2021, an increase from 26,000 people to nearly 112,000. And that number, while it stabilised this year, is still around 43 percent higher than it was, higher than in 2020. The other statistic that we can see, looking at the Estimates, is that there’s over 400,000 Kiwis now that are carrying tax debt, and that, I guess, as a percentage is equivalent to nearly 10 percent of the working-age population.

My question for the Minister of Revenue, quite simply, in regards to that significant burden of growing debt within our tax system, is: in his view, doesn’t this undermine the integrity of our overall tax system? And what is the Minister doing in order to refocus tax resources in regards to ensuring tax compliance and debt management, to protect the integrity of the system? Because off the back of the conversation we’ve just had around the cost of living payment, where the Minister in effect has deployed nearly 800 IRD resources to work on the cost of living payment, which I think by all accounts we have seen has been ineffective in regards to dealing with the issue at hand—what is he doing around actually managing the overall tax system, which this country is reliant on?

Well, I think in the context of COVID, the Government can be very proud of the achievements by the Inland Revenue Department in respect of tax debt. You know, other countries experience tax debt which is around between 7 and 17 percent of their taxation. They carry—

💬 Simon Watts: I can read that on the BBC.

You say you can read that.

💬 Simon Watts: I’m asking for New Zealand.

Well, I’m about to give you that, but I’m putting it in context. The data for New Zealand in 1919, 1920 was that overdue debt as a percentage of tax revenue, compared with overseas, was 5.3 percent—much better than those overseas comparisons. But the news gets even better than that. Notwithstanding that, in the last two years under COVID, overdue debt as a percentage of tax revenue has decreased further: it went down to 4.5 percent in 2020, 2021 and then changed marginally to 4.6 percent in the 2021-22 year. And you might ask yourself: how can those incredibly good results have been achieved in the middle of the complexity for businesses and taxpayers that’s been caused by COVID? And the answer is: because the administration of the tax system under this Government has improved. How has it improved? Well, we have a lot more automatic assessments, so that people don’t—

💬 David Seymour: You got better at taking people’s money.

Oh, he says we’ve got better at taking people’s money. No, we’ve actually got better at helping people neither pay too much tax or less than they owe. And people appreciate that. They like the fact that they have automated systems that better calculate their payments of tax during the year, so that at the end of the year there’s no wash-up payment necessary for them. Working for Families payments are generally more accurate than they used to be. People can get a personalised tax code now, rather than paying secondary tax and pay too much tax during the year or perhaps too little and have to either pay more at the end of the year or get a refund. Now, they can get a personalised tax number that better reflects their incomes. So, for all of those reasons, I’m pleased to assure the committee that rather than tax debt being a problem, we’ve got the remarkable circumstance that not only are we lower than those international averages, we are further lower compared with them than was the case pre-COVID, when most other countries are going the other direction.

Final point I would make is that one of the reasons why that is the case is that businesses in New Zealand are sound. Unemployment is very, very low, at about 3.5 percent. Very, very low, so people can afford to pay their bills. They can afford to employ people, obviously, because unemployment is so low. And they’re not racking up lots of tax debt, because their finances are good enough for them to be paying their taxes as they fall due—I think something that, I’m sure on this side of the Chamber, we celebrate.

In defence of the Minister from the heckling just before, even the National Party’s own voters aren’t in support of their tax cuts for the wealthiest.

So, just referring to this Estimates Hansard that I have in front of me—this is a bit of a niche question for the Minister, but I’m hoping that he can provide a response—on page 4 of the Hansard document, it is me asking him a question about the research and the pre-hearing questions that he had provided to the Finance and Expenditure Committee, with regard to research on GST and effective overall GST rates being paid. He had indicated in those pre-hearing questions that he was planning to release the methodology in the interim, prior to September. Minister, we are a week out from September and we still don’t have that publicly released information. So I’m wondering if you could, please, shed some light on that.

Just before I do that, I now have the information that the leader of the ACT Party requested on the—

💬 David Seymour: What took so long?

Well, I wanted to get the accurate figure for him because I’m so known for my accuracy. I didn’t want to spoil my reputation in the House, nor sully that member with second-rate information. The revenue increase from the new 39c rate is $540 million per annum.

What is $540 million per annum as a percentage of Government spending last year?

Less than 1 percent.

Can the Minister confirm it’s less than 0.5 percent of what the Government spent last year?

Not off the top of my head. But if the member’s done the calculation, I’m happy to accept it.

I did it off the top of my head and he probably should. I ask the Minister—[Interruption] I know Anna Lorck is astonished, because they’re not so proud of her mental arithmetic there in Tukituki.

I just want to ask the Minister about the high-wealth individual project. Of the 400 people that were identified for this—frankly—inquisition, how many have completed the first, second, and third rounds of information requested from them, and is he satisfied with that rate of progress?

Thank you for that question. Yeah, I’m pleased to report that the vast majority of high-wealth individuals that are within the ambit of that statistical gathering exercise are cooperating—as they must, obviously, in order to comply with the law. But they’re doing so willingly, and compliance rates are in excess of 90 percent.

In respect of the question from Chlöe Swarbrick on the date of release of that GST methodology paper, I’ll look into that and try and make sure I make the end-of-August date that I promised. I’m not over the detail of that, as we speak.

I can confirm for the Minister that the revenue from the 39c tax rate is 0.42 percent of what the Government spent last year, but we don’t boast here.

💬 Hon David Parker: You said it was 0.1 percent.

Well, everyone’s got to stand for something. Does the Minister believe, in light of his answer regarding the high-wealth individual project, that he will still get the information he sought in time to release how much money a certain sector of New Zealand has, right before an election campaign, as originally scheduled for June 2023, when the project was launched?

Yes, I—it’s not especially related to the election date.

💬 David Seymour: Really?

💬 Simon Watts: Not especially related.

No, well, it’s not related to that at all; in fact, this was one of the projects that I made clear to the Prime Minister, when I sought the revenue portfolio, that I wanted to do some work around, because I do think that there is a big gap in the understanding that we have in this Parliament and in our society as to what effective tax rate is paid by different sectors of society. We know that very well for wage and salary earners, for people that earn their income through interest in the bank. We know the distribution of that across society. We know that low and middle income people spend about, roughly, two-thirds of their income on GST-inclusive goods and services, and the bottom eight to nine deciles—the mix of the third that is not on GST-inclusive goods and services changes within those deciles for lower-income people. They’re spending about a third of their income on rent, which doesn’t attract GST. For middle-income people, it’s on their mortgage, and higher-income people it’s phasing out of mortgages and going into savings. But, generally, in those bottom 80 percent or 90 percent, roughly two-thirds of people’s income is spent on GST-inclusive goods and services, which means that the effective GST rate for all those people is roughly about 9 percent of their income, in addition to their income tax. Why I’m sure Chlöe Swarbrick is interested in those issues is that you have to have an understanding of the distribution of GST payments across society in order to have a real understanding as to what is the distribution of overall taxes by decile. So that’s one of the reasons we’re giving that information.

Now, to do that, we had to change the law, because the law didn’t allow clearly—it was arguable whether the commissioner was entitled to gather that information for policy purposes as opposed to tax administration purposes, and the risk that Revenue faces, when they ask for that sort of information, is that taxpayers can say, “I’m paying all my taxes; this is a fishing exercise. You’re not entitled to this for policy purposes. Go away.” We thought that wasn’t right to have that gap in information and, in order to do that, we had to change the legislation. We actually did that very quickly in the first Budget following the election. We passed it under urgency. Some parties criticised us using urgency. If we hadn’t done that, we wouldn’t be able to do this information gathering during this triennium, which we thought should be within the power of Government to do. So we passed that amending legislation, which then enabled the revenue department to gather that information. We set up the rules based on their advice as to how we do it. We’ve got an advisory group as to how that information should be gathered and analysed, which includes public and private sector experts in tax matters. That information is currently being gathered and, as soon as it is gathered, it will be analysed and, as soon as it is analysed, that information will be released publicly.

Just on exactly that research that the Minister’s alluding to, we have an Official Information Act (OIA) of Treasury advice from early 2021 which points to 42 percent of high-wealth individuals paying less than 10 percent of their total income in tax. Can I ask the Minister if his research is showing that the picture is better or worse than that initial research?

I don’t yet know the answer to that question. I’m in the dark, as others are. I have my suspicions that the rate of tax paid by the highest-income people in New Zealand is lower than the middle class, but this data-gathering issue should prove it one way or the other.

I move, That the committee report progress.

Motion agreed to.

House resumed.

Madam Speaker, the committee has considered the Appropriation (2022/23 Estimates) Bill and reports progress. I move, That the report be adopted.

Motion agreed to.

Report adopted.