It’s the stuff of politicians everywhere – magical thinking where voters pay less and somehow get more and better stuff. You’d think we’d learn or remember, yet taxpayers and ratepayers seem to lap it up every time, thinking this time is different.
Somehow, the politicians promise, taxes can be cut at the same time as new motorways are built, schools modernised, incomes increased, living costs reduced…and all before the next election. Circles can be squared, budgets balanced and debt reduced if only you’d elect these special politicians with the power to do more with less, while saving the planet and curing cancer in their spare time.
It’s nothing new, and now we’re seeing the same old recipe rolled out on traffic islands and street corners up and down the land in elections for mayors and councillors. Auckland mayoral candidate John Tamihere has promised to freeze rates and build a double decker harbour bridge. Now National Leader Simon Bridges is also promising tax cuts, more infrastructure and a faster growing economy, all without changing the fundamental settings of both the economy and government.
On Monday, Bridges launched what seemed to a be a substantial package of economic policies unusually early in the political cycle, including what on the face of it seemed some politically risky policy headlines. The Opposition leader described the 44 page discussion paper, the fourth released under his leadership, in epic terms encompassing 50 policies for the next election and 30 areas for further consultation.
“This document is part of the biggest policy development process by an Opposition ever,” Bridges told an audience of accountants and tax experts in Auckland.
“We’re doing the work now in opposition so we’re ready to hit the ground running in 2020,” he said.
Re-committing on NZ Super
Perhaps surprisingly given the third rail-like nature of the pension debate, Bridges re-committed to Bill English’s policy of increasing the age of eligibility for New Zealand Superannuation from 65 to 67, starting in 2037. That separates National clearly from Labour and New Zealand First, who are wedded to the status quo, although Bridges did throw a bone to Winston Peters by copying his policy of doubling the number of years migrants need to live in New Zealand to get the pension to 20 years.
Another politically risky move was Bridges’ plan to consider using congestion charges, although he pledged to make them “revenue neutral”. There was also the slightly surprising acknowledgment that his government might keep Labour’s R&D tax credits.
But the main focus was on tax reductions and commitments not to increase taxes, including indexation of tax thresholds to inflation, reversing the 11.5 cent per litre regional fuel tax in Auckland and promising not to increase fuel excises in National’s next term in government.
National would also look at cutting New Zealand’s 28 percent corporate tax rate, although Bridges was careful not to commit to a cut. Most of the benefits of corporate tax cuts go to overseas investors and can quickly blow a hole in any budget settings.
But no big changes…yet
For all of Bridges’ fighting talk of the biggest opposition policy development process ever and being ready to govern in 2020, the plan did very little to address the economy’s fundamental problems, beyond the usual chatter about red tape and improving business confidence by not being Labour.
Both Bridges and his Finance Spokesman Paul Goldsmith also talked a good game on the diagnosis of New Zealand’s problems of low-to-no productivity growth, insufficient infrastructure investment and high housing costs – but proposed little that would change the status quo of total GDP growth powered by cheap (and temporary) foreign labourers and the wealth effect on spending on tax-free capital gains on housing.
The policies did not address the core issue of redressing the massive inter-generational transfer of wealth to property owners over the last 20 years from renters over this generation and the next. National opposed the capital gains tax and Bridges also plans to reverse Labour’s extension of the bright line test for landlords making capital gains to five years, bringing it back down to two years. There was certainly no talk of any wealth or land tax.
There was also no suggestion of changing the basic model of economic growth at the moment, which is to pump up the population with working age migrants that pay income tax and GST while also keeping downward pressure on wages, costs and prices of goods and services (not property).
The glimmers of hope
However, there were signs National might be shifting in a couple of key areas, particularly around taxing savings and investing in infrastructure.
Bridges took the unusual step of proposing that savers be allowed to deduct the inflation component from their interest income before it is taxed. The corollary of that policy, which was not put forward, was that landlords would not be able to claim the inflation component of their interest costs for tax purposes. Now that would be a policy to have an impact, given it would have reduced the effective tax deduction for landlords last year by $600 million, which might have been enough to offset the lost tax receipts from lower withholding taxes.
“Not accounting for inflation in the tax system creates distortions in economy-wide investment and savings decisions and the allocation of capital. We are seeking feedback on whether we need to rethink this approach,” the document concluded.
National also broke with over a decade of orthodoxy by not setting a net debt target.
“We will need to wait until next year before determining our debt target, as conditions are changing rapidly,” Goldsmith wrote in the discussion document.
“We will not hesitate to borrow to invest in quality infrastructure, particularly when money is cheap,” he said.
“The critical thing, however, is the quality of the spending. New Zealand has the capacity to increase its investment in infrastructure within reasonable debt parameters, particularly if we are innovative in how we fund it, incorporating private sector investment.”
A higher debt target?
That opens the door for National to propose publicly funded infrastructure spending backed by fresh government borrowing. Bridges is certainly leaving his powder dry to match Labour if Finance Minister Grant Robertson uses the headroom within his new 15-25 percent of GDP range for net debt.
“National believes it makes sense to use long-term debt financing to fund infrastructure that benefits future generations,” Goldsmith wrote, right above a chart showing New Zealand Government net debt being significantly lower than other developed nations.
National hinted at more to come in a new ‘Building New Zealand’ discussion document due later this year, including the potential for fresh incentives for councils to invest in infrastructure.
“It is important that local councils have the right incentives to encourage new housing development. More will be discussed in the Building New Zealand Discussion Document later this year.”