IMF New Zealand Mission Chief, Evan Papageorgiou

Last night, the retiring former Finance Minister, Grant Robertson, finally endorsed a capital gains or wealth tax.

But he chose his last speech as an MP, his Valedictory Statement, to make his announcement.

In office, Labour refused to even consider one.

“New Zealand’s tax system is unfair and unbalanced,” he said.

“We are almost alone in the OECD in terms of not properly taxing assets and wealth in some form. Our current system entrenches inequality. “

He said that political consensus was needed “to ensure we get it right and it sticks.”

He was not alone in saying that yesterday.

So did the International Monetary Fund (IMF), who, even before they held their media conference to explain their reasoning, had been given a brush-off by the new Finance Minister.

“There are some things that are certain in life: death, taxes, and the IMF recommending a capital gains tax,” Nicola Willis told journalists at Parliament.

Minutes later, the IMF Mission Chief,  who had just spent a fortnight here examining the economy, explained why his report was recommending it.

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Long term, the IMF sees structural challenges to New Zealand’s fiscal situation, which under current policies will be able to be dealt with only by borrowing.

Those structural challenges will largely be the fault of the baby boomers.

The IMF is only echoing what the Treasury started telling the Government back in 2021: Either entitlements like National Super are radically reduced or a new tax, preferably a capital gains tax, is introduced, or the deficit and borrowing will blow out to unsustainable levels.

In 2021, in a background paper prepared with the Long Term Fiscal Statement, Treasury officials said: “Fiscal changes in response to population ageing will have economic effects as well. If there is no fiscal response, public debt will reach unsustainably high levels, implying that at some stage policy changes will simply have to be made.”

It was debt that was the focus of the IMF’s report and subsequent comments yesterday.

“With net general government debt at around 20 per cent of GDP at end-2023, New Zealand’s government debt is sustainable,” the report said.

“However, debt increased more rapidly than in many advanced economies in recent years and will continue its upward trajectory absent decisive consolidation.

“The authorities have emphasized the need to make New Zealand more fiscally sustainable in the medium term.

“In IMF staff’s view, restoring an operating surplus in the 4-year forecast period should remain the objective, underpinned by efficacious caps on operating allowances.

“This could strengthen credibility and preserve the policy space to respond to shocks.”

The report called for effective caps on future operating allowances and said spending reforms should be based on a comprehensive cost-benefit analysis of government programs “and address long-term ageing-related fiscal pressures.”

And then: “New Zealand would benefit from a more efficient, equitable, and sustainable tax system,

“New Zealand already has one of the most efficient goods and services tax systems globally.

“However, tax policy reforms are needed to promote investment and productivity growth, increase the progressivity of income tax, and mobilize additional revenue in response to long-term fiscal challenges.

“To achieve these objectives, reforms should combine a comprehensive capital gains tax, land value tax, and changes to corporate income tax.”

POLITIK Members of the IMF Mission team in Wellington yesterday

The IMF New Zealand Mission Chief, Evan Papageorgiou, conceded that the IMF had  recommended that in the past and “I assume that probably  we will again in the future.”

“Look, we repeat that line because we think there is a reason why,” he said.

He said that was because the IMF thought there was a fundamental purpose for a different tax system.

“Whether there’s any action on the back of that, I think that will come down to the New Zealand people and the way they want to see their paychecks taxed and what they want the future of a country to be,” he said.

“Our advice here is that the tax system has a very distinct role to play in how the economy operates and what sort of activities are incentivised or potentially not incentivized to operate.”

Papageorgiou said the IMF had not considered recommending a wealth tax because there were many technical and implementation issues that needed to be considered.

“Unlike wealth taxes, capital gains taxes are used pretty much in many or most other advanced economies,” he said.

“And so there’s a well-understood guidebook or a way of introducing and maintaining a good capital gains tax system.

“Wealth taxes can be a little bit more specific on what they’re trying to achieve.

“But at the end of the day, if the goal is to achieve a more effective and equitable tax system, that can be achieved with a  capital gains tax.” 

Papageorgiou may have come to Wellington at the wrong time.

He admitted that as the Government was still preparing the Budget, it had few details it could share with him, and he would be gone by the time it produced its Budget Policy Statement.

But he cautioned the Government that any income tax relief should be fiscally neutral so that it had no inflationary impact.

“This could mean in many ways potentially on the timing and also on the size of those proposed measures,” he said.

“We understand there is still quite a lot of discussion taking place, so we didn’t have the exact details of either the proposed tax relief or any other measures for that matter,” he said.

“Our advice is that if any sort of tax relief program is delivered in a fiscally neutral way, it does not need to increase inflation.”

However, the most important thing was the long-term structural challenge.

“The more important thing is that our advice also comes hand-in-hand with additional advice about addressing the structural fiscal issues pertaining to benefits, taxation, and additional long-term spending on ageing, for example.”

Treasury’s 2021 Long Term Fiscal Statement forecasts that New Zealand will start to incur successive fiscal deficits in 2030.

Treasury’s regular Economic and Fiscal Updates forecast the deficit for the subsequent four years, which means that the  2030 deficit will appear in the forecasts in 2026.

Both the IMF and, now, Robertson might hope that by then, a serious rather than flippant debate on a Capital Gains Tax had begun.