02 Apr Lattes, movies & paying off debt
By ADRIAN CHANG – BusinessDay
A latte today is an education tomorrow so saving your tax cuts is the way to go.
That’s the advice of Tom Agee, a senior lecturer at Auckland University’s business school. He says saving the extra $15 per week the average worker receives from today, could add up to an overseas holiday or a university education over time.
Agee says if he and his wife save the $15 per week, between them they would save $1560 every year. If put into a bank deposit earning 2.5 percent interest per year after tax and inflation, they would have $19,712 in 11 years – enough to pay for their seven-year-old grandson’s university fees.
Alternatively, in five years, those small weekly savings would become $8,300, which would pay for a nice overseas holiday.
“The tax cut is new found income and for those couples who possibly can, saving is the key and compounding interest is the secret,” says Agee.
How exactly the tax cuts, which come in from today, should be spent is a subject of robust debate. BusinessDay asked leading figures and workers how they thought the tax cuts would be best spent.
Prime Minister John Key recently suggested he would like to see New Zealanders consider giving their tax cuts to charities, who are seeing donations dry up as the recession bites.
Key has also been a strong advocate of the tax-cut-as-stimulus theory and hopes that the extra money in people’s pockets will translate into extra spending to boost the economy out of the doldrums.
However, chairman of the Shareholders’ Association, Bruce Sheppard, disagrees with Key’s advocacy of “spend-spend-spend.” Sheppard says the extra income should go first into saving or paying off debt.
He acknowledges this would do no favours for the local economy because New Zealand’s debt is with foreigners and thus most of the $1.5 billion in tax cuts would be sent overseas. Despite this, he advocates personal prudence.
“We are entering unprecedented, unpredictable times. It’s not quite every man for himself, but John extolling the virtues of spend and pray isn’t going to ring too many bells,” says Sheppard.
ASB chief economist Nick Tuffley says tax cuts elicit a range of responses from households.
“Some people will save the whole lot, some people will spend the whole lot. You’re going to get the actual outcome fall somewhere in between, which does mean household spending – all other things being equal – is likely to be slightly stronger than it would otherwise be,” says Tufley.
He says last year’s tax cuts were likely to have contributed to the moderate boost in consumer spending seen in the last quarter of 2008.
Erin Johnston, an English teacher from Newlands Intermediate near Wellington, is relatively lucky in that she has the luxury of choice. Earning the national average of $48,000 per year, she falls nicely into the new definition of the 21 percent tax bracket and therefore can look forward to an extra $15.67 per week.
“I will be spending the money on extras like going out for lunch or a movie with friends once a week,” she says.
On the other hand, she says, if there is any extra money left over, it will go straight into a savings account.
“I’m saving because I’d like to go on holiday this year. I was saving to buy a house, but the way things are, this would be impossible in the foreseeable future.”
Jade Haira does not have the luxury of choice. She works full time at Burger King for the minimum wage, now $12.50 an hour. She lives with her parents and pays half her wages as board to help support the family.
Assuming she works on average 37 hours per week, her annual income would be just over $24,000. That means Haira misses out on direct tax cuts but stands to benefit from the Independent Earner’s Tax Credit (IETC).
This would leave her with an extra $8 per week after levies, and while she’s grateful for any help, this would barely make a dent on her outgoings.
“There are so many more people out there like me, and none of us are benefitting from this. All the other poorer people are not benefitting from anything the government is offering, but if you’re rich, you get more benefits from the tax cuts,” says Haira.
She says people at her work are trying to support their partners and children on minimum wages and inconsistent hours and these people are the most in need of a break.
Further, because she and others on the minimum wage only just fall within the threshold to qualify for the IETC, if she were to get sick or go on holiday, her annual income would almost certainly drop below $24,000.
“I feel tied to my job, and losing it would be devastating. If something happened, like I got sick, well, you can’t help that and it feels like I’d be financially punished for something I can’t control.”
Meanwhile, Labour Party finance spokesman David Cunliffe says people are entitled to use their tax cuts as they want.
“But with a slowing economy, growing job worries and higher food prices, I suspect most New Zealanders will use them just to help ends meet.”