Was the New Zealand 2023/24 Budget inflationary?

Yesterday the New Zealand Budget was released and described as “surprisingly frilly” for a no-frills Budget. As a result, is it inflationary?

My answer is “no idea” – I just wanted to use the same title as the Australian Budget post. You yell inflation at me and I say “monetary policy offset through higher interest rates” – and the monetary and fiscal authorities can argue about that. New Zealand based economists can describe that for us.

Instead I’m going to have a think about a couple of the policies: game subsidies and the higher top tax rate.

I also see that they are ramming from the Tax Principles Act. I’ll save thoughts on that for its own post later on.

Are they making my Steam games cheaper?

That would be nice – not particularly fair, and definitely not an efficient use of funds – but at least it would benefit more than 1-2 people.

Instead they are doing the film subsidy rort for game companies now.

Rant on – if you don’t like rants skip

So for context New Zealand currently wastes about $200m pa putting that little “supported by NZ” logo at the end of credits on a variety of movies and television shows.

No that isn’t fair, they also support Weta’s well known culture of sexual harrasment and general toxic work culture – you aren’t really from Wellington unless you personally know someone that has been sexually or verbally harassed by senior staff at Weta.

They also make sure Peter Jackson has enough money to influence local council elections and make sure that nothing gets built in Wellington – while the city slowly collapses into a slum. And lets not forget that it also gives politicians the chance to go to movie premiers and maybe get a photo with someone famous!

The fact that New Zealanders are not publicly disgusted at film subsidies, and the corrosive impact they have on Welllington particularly has long frustrated me – and now with lights falling out of the sky, water mains bursting on a daily basis, the central city smelling of sewage, half the buildings still unfit for use (red zoned) since 2016, house prices out of control due to the lack of historic building, and the recent tragedy with fire, you’d think making the capital livable again would be the priority.

Instead, lets also give money to game developers, so they can lobby for their old neighbourhood to never have new building or infrastructure.

And then former Green MPs have the temerity to pretend there is justice in this – I guess the catch phrase of “green growth” just means making sure the green is going to whatever favours them.

Man, honestly screw you (not Economissive – he’s good people calling this trash out).

I’ve never liked the rort that is film subsidies. And Jacinda’s decision to keep them scaling up was a huge disappointment. But the fact this exists alongside the utter degredation of the infrastructure in my old home of “Wellywood” – especially in the last five years – should make a lot of people as angry as I am.

Rant off

Now that is off my chest – and if anyone is insulted by it please contact me in person so I can double-down – lets pretend you like the game subsidy and you are not a corrupt lobbyist. Instead you believe that there is good potential for New Zealand to compete with the world in “weightlesss” technologies – and with a bit of support, we can build an industry together! [dynamic comparative advantage]

If that is you, then the barbs were definitely not at you – I like you, and I like the way you’re thinking about things.

First off I’d warn you to ignore any “economic impact assessments” that come out – anything with that name ain’t a real assessment, and will make up a bunch of benefits and not mention costs. Lets instead think about the nature of this seed funding:

  1. A gaming company will take on staff that have certain skills, around coding and creative designs.
  2. It will combine those staff and some underlying capital to produce games.
  3. The gaming industry is risky – but if they have a good idea there is a chance of making a good return. This return is shared in earnings and wages between the capital owners and the workers.
  4. If things go south that’s pretty tough – the capital owner loses that, and the employees need to find more work.

If the gaming company doesn’t happen, people are in other jobs and the “capital” is allocated to other uses. The fact something is made doesn’t mean there is “net value”.

If people privately decided not to do this, but then did with a subsidy, it is either because they were incentivised to take on a risk they wouldn’t otherwise – or they are being shifted to a lower value activity.

You might say STOP, I’VE GOT YOU – imagine we have an industry with valuable skills that are transferable between firms, but each potential firm faces a lot of risk, in that case we may have a coordination failure where no firms move into that industry and invest … but if they did, value added!

Ok nice – that was a much stronger argument than I expected.

But why is this gaming in particular? Why doesn’t the government generally offer a scheme where they “co-own” firms – providing beneficial arrangements on failure, but taking a cut when there is success! You know, like a limited liability bankruptcy regmine with a corporate tax system.

…. Wait. Are you telling me we could just change those settings, rather than picking our friends and giving them handouts!

Specifically picking gaming companies, and giving them support, instead of articulating and understanding a general argument about the insurance and support settings in a country is dumb. New Zealand was unique in how well this was understood by politicians – but modern politics in New Zealand appears to involve a series of people who think they are the smartest person in a room, but only experience it when they’re alone.

Trust taxes at 39%

Ahhh, glad to see this change! The gap between the top income tax rate and the trust rate is problematic – see here – so this makes those settings more sustainable and undermines a bunch of potential tax planning.

What’s the planning? Well previously the trust rate was 33%, but if you earn over $180,000 the top tax rate is 39%. So say you have your own business and you earn $400,000. You could pay yourself $180,000 and have the extra $220,000 distributed to a trust. That $220,000 gets taxed at 33% (instead of 39%) and then the following year you just send yourself that money without additional tax – noice.

Now IRD has fancy rules to try to avoid really bad examples of this, but it is hard to avoid subtle avoidance – even with the new trust information collection rules. So increasing that rate is a surefire way to sort things out!

However, one thing that gets a bit mixed is some thinking that “trust income is always avoidance”. Hold up mate, one of the issues with bumping the rate up to 39% is that some people will now be taxed at a rate higher than they would if it was classed as their income!

Imagine you have zero personal earnings, but your trust earns $14,000. You don’t really pay much attention, and you live meekly in your own cottage eating leeks that you grow for yourself. Nice.

If the $14,000 was taked as your income you’d pay a tax rate of 10.5% on it. If it is trust income, you pay 39%.

As a result, you’ll get some unattentive people who are genuinely using it as a shelter who pay more tax.

What is the solution here? Well you could treat trust income like company income – so the tax is a withholding tax, and when the income is paid to the person imputation credits are attached.

Problem solved!

Well, remember our mate before – they are pretty inattentive. Reporting everything as if it is company tax is quite involved – that might be a bit much to ask them to do. We could get around that by setting an income deminimus … except the issue only exists for those with lower income.

These are issues that are too hard for someone like me – so I’ll leave that to the experts and just say this was interesting to see!