The Fiscal Drag

The New Zealand government is currently sitting on a healthy budget surplus. Part of this surplus has come about from a record haul of revenue based on the income tax that has been collected. As inflation rises, so does the wage packet that most people bring home. As your wage packet increases you move into the next personal tax bracket meaning that you will pay more income tax and increase government revenue.

As we have a progressive tax system – where the more you earn the more you pay – this means that a larger part of your income will go into the government coffers. This is what is known as the fiscal drag. Due to economic conditions – inflation – your salary is moved into a higher tax bracket and therefore you are taxed at a higher rate.

In most countries, this is rectified by having the progressive personal tax rates lowered but this has not happened in New Zealand.