On John Key’s agenda for the nation

Compensate is such a slippery word. If you set out to make the elite squad in team A immensely better off with money taken from Teams B and C, and you also say those two bottom teams will (somehow) be left no worse off – is that really a compensation? Haven’t you just widened the existing gap between Team A and everyone else – and here and overseas isn’t a big income inequality gap a recipe for poor economic performance, bad health outcomes and increased criminal activity in society? Hell, even Peter Dunne is sceptical that the government can ‘compensate’ the vulnerable for the hike in GST to 15%, without fostering exactly the sort of cumbersome and costly bureaucratic delivery mechanisms that this government claims to abhor.

There was more to it yesterday than tax though. There seemed to be three main components to John Key’s speech : (a) tax cuts largely paid for by a hike in GST (b) mining in national parks and on conservation land, while building more roads. (c) giving firms easier access to the r&d from Crown Research Institutes, so that business can continue to get the taxpayer to pick up the tab for the research that keeps them competitive. After all, corporate welfare is always such a blessed thing – its only social welfare that corrodes enterprise and ambition.

Tax cuts

Initially, the Key speech was striking for the several roads NOT taken as much as for the road finally chosen. What is the opportunity cost, I wonder, of convening a tax working group (TWG) of experts and then – only weeks afterwards – junking almost all of its main findings ? That’s what John Key did yesterday. Goodbye land tax, and goodbye also to any prospect of a comprehensive capital gains tax. Once again, a New Zealand government has proven itself too politically timid to tackle the most economically damaging and unfair distortion within our tax system. Wage and salary earners pay tax – those who live off capital gains do not. So it has been, and so it shall continue.

Goodbye as well to the third best option – The Risk Free Return Method of taxation that Geoff Nightingale of the TWG described to Scoop in December as being a ‘rifle shot’ targeted at property speculation, and a step that would have removed the ability for loss-making rental property investments to be written off against income. Clearly, National Party MPs have too many friends in the rental property sector for that to be tolerated. At most, we are going to see changes to the depreciation rules. Which are overdue, but it is the least that can be done, by a government that promised us boldness.

Why then, did Key bother with the TWG window dressing, if the result was this pre-determined ? Asking for expert advice on how to fix the anomalies and injustice in the tax system – and then dumping the advice before the ink was dry on it – makes no sense. If this is the kind of efficiency John Key has got in mind for the rest of the economy, then we’re really and truly doomed.

Again, look at those roads not taken. Is there anything remaining on this agenda – beyond the failed snake oil of tax cuts – that is likely to lift this country’s economic performance ? No. Anything that is likely to create jobs for young people, one in five of whom are currently unemployed? No. The lack of vision should have been obvious when Phil O’Reilly of the NZ Business Council came on RNZ on the morning of the Key speech to claim that lowering taxes would enable firms to invest, do more research, generate wealth etc. such that the tax cuts ‘would almost pay for themselves.’

This is the voodoo economics of the Reaganite 1980s. an approach disproven time and again since. Essentially, the Budget package on May 20 looks likely to transfer wealth from the poor and middle income earners, into boosting consumption by those on high incomes. The brutality of the proicess is reflected in the skewed nature of the rewards – for those on top incomes, whereby the tax cuts alone will deliver more than the annual median income in New Zealand. As Labour leader Phil Goff has pointed out, a drop in top personal tax rates to 30 cents – which is Key’s started goal of tax reform – would deliver high income earners hundreds of dollars extra per week, and give Paul Reynolds at Telecom an extra $2,600 per week. However, those on the average wage of $48,600 stand to gain only about 35 cents from the process, and even those on $70,000 would receive only $12..69 – which would be cancelled out by the rise in GST. How can this shonky money-go-round possibly serve as an engine for economic growth and provide an incentive for people to work even harder, longer and smarter than they are already?

What we have been told by both by Finance Minister Bill English and by Key – is that these things need to be seen in balance, and social welfare payments will be increased etc. As already mentioned though, even Peter Dunne is sceptical ( if one raises GST to 15%) that there is an economically efficient method of compensating poor and middle income earners. The cleanest and most bang-for-the-buck method of doing so would be the one that has been advocated by the Greens and the Maori Party for years – namely, to exempt a band of initial earnings from tax altogether for those on the bottom rung of the income ladder.

Still, as Buddle Findlay tax partner Neil Russ has told NZPA, the basic equations for tax cuts do tally, if GST is hiked to 15% and the depreciation rules on property speculation are changed. Increasing GST would he says, generate an extra $2 billion, and another $1.6 billion from changing the depreciation rules. On the other side of the ledger :

Russ said it would cost about $1.6 billion to align the top personal, trust and company rates at 30 percent.

It had been estimated by the Tax Working Group that it would cost around $600 million to increase benefits, superannuation and Working for Families payments to compensate for the lift in GST.

So yes, it can be done. The question is – will New Zealand be a more productive economy, and a better society to live in, after income inequality has been increased in this fashion ? Forty years ago, George Jackson expressed what this process looks like, viewed from the bottom :

To them that have, shall more be given. To them that have not, even the little that they have, will be taken away. I don’t like this life. All my life, I have been basely used, abused and repressed – as if it was the natural order of things.


Of all the myriad commentaries that have poured forth over the past 24 hours on the Key package, an essential one to read is Russel Norman’s Address in Reply speech

Mainly because it ranges across the wider, and equally lamentable features of the government’s agenda – including the proposals to mine national parks and to build more roads above and beyond the programme previously announced by Michael Cullen.

Later this month, we will get more details on just which parts of the conservation estate the government proposes to lay open to foreign mining companies. For now though, a truly pathetic aspect of the Key speech was his assurance that any such mines would have to meet ‘best environmental standards.’ Well, to paraphrase Gertrude Stein ( who once famously wrote that ‘ a rose is a rose is a rose’) a mine is a mine is a mine. Put one in a national park and you destroy it forever, best environmental standards not-withstanding.

If there is a vision to this aspect of the government’s agenda it is not one born in the 21st century. More mines on conservation land and more roads everywhere else is a vision that belongs to the grand old 19th century tradition of Rip, Shit and Bust, where natural resources are infinite and developers are the agents of progress. Oh, and as conscience money for violating our national heritage, those mining companies will have to pay a pittance into a Conservation Fund. Thanks, guys. Flowers around a slag pit? Always a good look.

As Norman concluded about the Key package as a whole : “There is no vision for a smart economy that looks after the prosperity of people and the natural environment. There is only a corporate statement of intent.” Even on such limited terms, an economic policy that is being driven almost entirely by tax cuts will do little to shore up this country’s competitive position, and the income inequality that will result is simply not socially sustainable. Surely, the government’s smarter friends in business can see that – and even as they pocket their tax cuts, they must be feeling worried about the future.


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