Gordon Campbell on John Key’s economic package

The National Party has billed this tax package release as an “economic management plan,” which could land them in truth-in-advertising trouble with the Consumers Institute. The reality is far more modest. What we got yesterday was a ‘me too / and raise you some’ set of tax breaks that will be paid for by cuts to the Kiwisaver scheme, by scrapping private sector research and development, and by abolishing the remaining $265 million of the Ministry of Foreign Affairs and Trade’s modernization plans. The National package contained no hint of an economic growth strategy for a country facing a domestic recession and an international banking crisis.

Oh and by the way, MFAT isn’t all lattes and limousines. Currently, the New Zealand embassy in Washington – our outpost at the heart of capitalism – doesn’t even have credit card facilities.

Rather than encourage savings – a good thing to do, you would think, during a global credit crunch – National has created incentives that will deter them. The level of employers’ matching contribution to Kiwisaver will be reduced, from 4 % to 2% and employers will be allowed to offset contributions from wages – meaning : workers will be expected to finance the employer contribution by foregoing their wage rises.

For many of the 800,000 New Zealanders who joined Kiwisaver on the understanding that there would be a 4 % employer contribution, these reductions to Kiwisaver will be a major setback. For workers on or below the average wage receiving Working for Families support the changes to Kiwisaver will be a significant loss, well exceeding the pittances – at best – that they might get from National’s tax cuts. The goalposts have been well and truly shifted. Kiwisaver has been gutted, in order to offer a few more dollars– mostly in the range of $7 to 14 a week – to the more affluent. This is crisis management of the economy ?

In addition, National’s “economic management plan” will also scrap the 15 % research and development tax credit entirely, This comes six days after National confirmed it will also be scrapping the $700 million Fast Forward science and agricultural research scheme. Though both were imperfect, such schemes were at least a step towards reversing the New Zealand private sector’s abysmal allocation of resources to r&d, and this country’s poor support for science funding in general – surely, necessary planning inputs if we are ever going to be able to foot it with our trading rivals in future.

Putting tax cuts ahead of science and research neatly underlines the lack of vision, or sensible strategy for growth in the National package – unless of course, one still belongs to the 1980s cargo cult that believes tax cuts to be a growth strategy in themselves. Reality, in the shape of the New Zealand experience ( 1988, 1996) and the US experience under Ronald Reagan and George W. Bush proves otherwise. The cutbacks on science and research will only send more scientists and high tech jobs offshore and rob New Zealand of the ways and means to add value to our exports. Ditto for the savings that would have helped to reduce debt, promote productive investment, help people to afford for their first homes, or plan for their retirement.

All those goals have been set aside – in favour of a consumption-led sugar fix that is bound to make New Zealand’s large current account deficit even worse. Far from being a considered, scaled back response to the current financial crisis, this package seems oblivious to it. The John Key who lamented on Monday the nine years of deficits until 2017 forecast by Treasury, has nary a clue on what to do about them. Shopping ( thinly disguised in Key’s speech yesterday as “ the need to support ongoing economic activity in today’s environment”) is not an economic management plan.

No wonder some of the harshest criticism of the National package has come from conservatives. Rodney Hide has lambasted it as evidence that a vote for National is a vote to replace Helen Clark, while retaining Michael Cullen’s economic policy.

“John Key has failed today to provide any economic leadership or direction to the country at a time of world financial turmoil. He has fiddled while the economy burns….John Key’s lack of any plan, vision or leadership verges on the irresponsible. He has chosen to cynically chase votes and not address the core issues of Dr Cullen’s profligate spending and Labour’s strangling red tape….”

Ouch. Even the coverage by the NZ Herald has been lukewarm to critical. Columnist John Armstrong for instance sounded less than overwhelmed :
The comparative losers are families on or below the average wage. They may look askance at John Key. They may well feel they have been hoodwinked.
Prior to today’s announcement, Key flagged a tax cut of around $50 a week for someone on the average wage. With National using $47,324 as its figure for the average wage, National’s tax cut actually amounts to $46.54 once it has been completely phased in. But only for those not getting Working for Families entitlements, national superannuation or a benefit.

Note : those figures apply only if we add Labour’s October 1st tax cuts that are already being received, to what National is offering in future. We shouldn’t. We should be subtracting them, because the difference is what National is actually providing. In some of the main income categories, the difference between the two tax packages is about $14 a week at best, before any Kiwisaver losses are factored in.

For those currently receiving income assistance under Working for Families, Armstrong continues, they will get about $10 more than the equivalent sum in Labour’s package – about half of what they would have thought they would be getting.

For those families earning less the than the average wage, the extra amount National is giving over Labour drops rapidly to the point where a family on $40,000 is actually better off with Labour’s cuts.
This will be a rude shock for those families. When Key said National would be retaining Labour’s additions to Working for Families, they would not have expected that would result in them being treated differently from other taxpayers once it came to National’s cuts.

Very well put. Even when you pit the National vs Labour positions against each other in April 2009 – when the situation is most starkly in favour of National for those earning high enough to be well rewarded – the deal has some startling drawbacks.

For example : as No Right Turn has pointed out in an excellent piece of analysis, about 60 % of the population won’t receive anything at all from the first tranche of tax cuts that National will phase in on April 1st, 2009. By the end of the entire tax cut cycle in April 2011, his analysis shows that about 2/3 of the population – mainly the low to middle income earners – will receive only about one fifth of the tax cut money that National is handing out, while the top third of income earners will receive over 80 % of it. Clearly, with New Zealand facing a financial crisis, National is offering the relatively wealthy the first crack at the lifeboats. The spread of reward from National’s overall tax package strongly supports a “ tax cuts for the rich” line of criticism.

Finally, the oddest. most cynical part of the National programme is the new Independent Earner Rebate. It would be interesting to hear what Roger Douglas ( who tried to make a virtue out of streamlining the New Zealand tax system) will make of this little doozy. In the spirit of ‘every child goes home with a prize’ this rebate will be paid out to everyone earning between $24,000 and $50,000, who isn’t currently getting a benefit, Working for Families, or NZ Super. There shall be no-one left untied to the apron strings of John Key’s nanny state.

To put it mildly, this is something of an ideological turnaround. The centre right has slammed schemes such as Working for Families for turning most New Zealanders into beneficiaries. Well, National’s Independent Earner Rebate move seeks out the roughly 350,000 New Zealanders who are not currently receiving state assistance, and explicitly devises a scheme to ensure that they do. This particular assistance package will be worth $10 a week, rising over time to $15 a week – and the administrative cost of assessing eligibility and of delivery of such a pittance (chewing gum, anyone?) should put a question mark over the net worth of the entire initiative.

Politically, this tax package now levels the playing field. Key has handed Labour and all the minor parties – from Act to the Greens – a new array of points on which to attack him. Far from being a visionary package that will excite his ideological base, Key has under-delivered, The domestic recession and the global financial crisis have provided a convenient rationale for doing so, but the problem is….the package contains no sustainable response to either of those challenges. Key has merely tweaked the tax system, and paid for it by cutting anything that can’t deliver him short term electoral advantage.

As his critics have already said, Key’s solutions – not to mention his entire front bench – hark back to the 1990s. Indeed they do. Tax cuts and de-regulation are not where the world is headed right now. They are a journey into the past. And while Key’s more fervent supporters wanted him to be Ruth Richardson, Key has chosen instead to embody something far closer to the grey calculations of old Bill Birch.