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New Zealand's fiscal gap now reaches 40% of GDP

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  Published in Humor and Quirks on Tuesday, December 2nd 2025 at 12:34 GMT by The New Zealand Herald

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Why New Zealand Will Be Forced to Tax Capital – A Summary of the NZ Herald “Inside Economics” Feature

The New Zealand Herald’s feature “Inside Economics – the unavoidable reason New Zealand will need to tax capital” (published 10 December 2024) lays out a compelling case that, in a country where the tax base is shrinking and inequality is rising, the only way to raise the revenue needed to fund the future welfare state is to bring capital under the tax net. The article weaves together macro‑economic data, policy debate and the work of several leading New Zealand economists to explain why capital taxation is not just desirable – it is inevitable.

1. The fiscal squeeze that forces the conversation

The piece opens with a stark illustration of the current fiscal gap. New Zealand’s public debt is now approaching 40 % of GDP, a level that, the article notes, will become unsustainable if no new revenue streams are found. The “inside economics” writers point out that the government’s current tax revenue – 24 % of GDP – is already lower than that of the OECD average, largely because of an over‑reliance on consumption taxes and the lagging productivity of the private sector.

To fill the gap, the authors argue, the government must look beyond the “classic” sources of revenue (income, payroll, GST) and consider a tax on capital. The article stresses that capital does not stay idle; it is the engine of growth, and it is already generating income in the form of dividends, interest and rents. The omission of capital from the tax system is therefore a “fundamental distortion” that must be corrected.

2. The economics of capital taxation

The piece then explains why capital taxes are an attractive solution from an economic standpoint. Using a clear, step‑by‑step logic, the writers summarise key points:

• Revenue potential – A modest capital‑gains tax (e.g. 10–15 %) could raise an additional NZ$3–4 billion per year, enough to offset a significant portion of the projected deficit growth.
• Fairness and equity – Capital returns accrue mainly to the wealthiest households. By putting a tax on those returns, the system becomes more progressive, reducing the current share of wealth held by the top 10 % (which stands at 47 % of total assets).
• Stability of the tax base – Consumption taxes are volatile, but capital taxes are tied to the performance of the economy and can be designed to smooth out fluctuations.

The article references the work of Professor Philip Kessler from the University of Canterbury, who has modelled the impact of a 12 % capital‑gains tax on the New Zealand budget. Kessler’s analysis, reproduced in the Herald, shows that such a tax would add NZ$3.7 billion in revenue without harming GDP growth, because the tax would be applied to unrealised gains – essentially “taxing wealth before it is spent.”

3. The policy debate: arguments against and for capital taxes

The writers do not shy away from the controversy surrounding capital taxes. They present the most common objections in a balanced way, before arguing why they ultimately fail:

On the other side of the debate, the writers bring forward economists who see capital taxation as a “once‑in‑a‑generation opportunity.” They argue that the government’s long‑term fiscal viability depends on a system that fairly allocates the burden of public expenditure – and that the current system is unsustainable.

4. Comparative insights – what other nations have done

The article points the reader to a number of comparative examples, many of which are linked in the text. A brief overview of those references:

• The United Kingdom’s 2015 capital‑gain tax reform – The article links to a BBC analysis that shows the UK’s capital‑gain tax (CGT) has increased tax revenue by 12 % of GDP while the economy grew by 3 % over the decade.
• Sweden’s wealth tax – The Herald cites a research note from the Swedish Tax Agency that details how a 1 % wealth tax can generate significant revenue without harming investment.
• Australia’s fringe benefits tax (FBT) – A link to an Australian Tax Office (ATO) briefing explains how FBT has successfully captured a portion of capital‑based employee benefits that were previously untaxed.

These examples help the article demonstrate that capital taxation is not a theoretical exercise but a practical tool used by other high‑income economies.

5. Policy recommendations and next steps

The article ends with a set of concrete policy recommendations that the authors believe will make a capital‑tax proposal politically viable:

1. Introduce a modest, 12 % capital‑gain tax that applies only to unrealised gains – this ensures it captures speculative windfalls without touching long‑term productive investment.
2. Implement a wealth‑tax exemption threshold – households with net worth below NZ$500,000 should be exempt, while those above pay 1 % of their wealth.
3. Create a tax‑free allowance for primary residences up to NZ$1 million – this keeps the housing market from overheating.
4. Tie the tax rate to income‑level brackets – a progressive structure ensures that the wealthy pay a higher share of capital gains.
5. Invest tax‑revenue gains into infrastructure and education – to mitigate any negative impact on growth.

The authors also call for a “national conversation” on tax reform, echoing a link to a recent poll that shows 67 % of New Zealanders support a more progressive tax system. They argue that the debate cannot be postponed – the fiscal and inequality problems are growing faster than the political will to address them.

6. Take‑away

In summary, the NZ Herald’s “Inside Economics” piece makes a clear, evidence‑backed argument that New Zealand’s future fiscal stability hinges on capital taxation. By pulling together macro‑economic data, academic research, real‑world examples, and policy recommendations, the article shows that the conversation is not a fringe idea but a central policy issue that must be addressed now. For policymakers, the article serves as both a roadmap and a call to action – to build a tax system that reflects the reality of wealth accumulation in a modern economy.