Opinion: Since the relative calm and certainty of the Clark/Cullen years Labour’s approach to tax policy has been an ongoing shambles. The announcement to take GST off fresh fruit and vegetables is the latest confirmation of that.
Labour’s tax policy has long since ceased to be based on principle and predictability, the way it used to be in the Clark/Cullen years, and before. Over the last decade Labour’s tax policy has been whatever it thinks will be popular at the time.
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Faced with National’s “tax switch” in 2010, which traded off across-the-board personal tax cuts against a rise in GST, Labour countered at the 2011 election by promising to remove GST from all fruit and vegetables, to be funded by a capital gains tax. It lost heavily to National and its allies. So, Labour dumped both policies for the 2014 election, but that did not prevent an even heavier loss to the National-led government.
In 2017, Labour resurrected the capital gains tax plan, but it was dropped by Dame Jacinda Ardern when she became leader seven weeks before the election, in favour of an independent tax working group to advise the incoming government on all aspects of tax policy.
The GST change may look superficially good, but is unworkable. It will not deliver anything like modest benefits claimed, while costing the Government billions of dollars in lost revenue
When it reported in 2019, the working party obligingly recommended a capital gains tax but opposed any changes to GST. However, a perceived lack of public support and the firm opposition of coalition partner New Zealand First led Ardern to rule out the capital gains tax (which she said she continued to favour) for not only the balance of Labour’s first term, but also for as long as she was Prime Minister.
Earlier this year, her successor, Chris Hipkins, squashed plans by the finance and revenue ministers that were at an advanced stage of Budget planning to introduce both a wealth and capital gains tax from 2025. More recently, in language remarkably akin to Ardern’s in 2019, Hipkins ruled out ever introducing both taxes while he was Prime Minister.
Now, faced with flagging opinion poll support just two months before the election, Hipkins has revived the 2011 GST policy, at a cost of $2 billion over the four years from April 2024. Though the plan has been ridiculed by every tax policy expert, opinion polls taken earlier have shown removing GST from fresh fruit and vegetables is extremely popular.
Hipkins has gone so far as to state, somewhat shamelessly, that popular tax policy is good tax policy, making it clear that his policy has nothing to do with efficacy, purity of design, or even workability, but everything to do with Labour clawing back as much traditional support as it can when it looks to be staring down the barrel of election defeat.
Labour’s tax policy u-turns of the last decade highlight the lack of any consistent principles when it comes to tax policy formation. That is damning enough, but Labour’s tax problems stem more widely from the fact that its spending ambitions always outweigh reasonable revenue expectations.
A good example is the recent GST and Working for Families announcements. Hipkins acknowledges the GST policy will cost the Government at least $2 billion over the next four years or so. Both policies are likely to be popular with potential Labour voters. Hipkins has suggested they will be funded by a separate tax flip-flop – removing the tax deductibility for depreciation on commercial buildings, which Labour had re-introduced as a Covid-19 relief measure. He has ruled out new taxes or tax increases if re-elected.
There is already speculation the Government’s books are in trouble, with reports the finance minister has asked government agencies to make substantial spending cuts, although not to the $20b magnitude rumoured. Given that, Hipkins’ latest funding promises look vague and unreliable.
During the pandemic, Labour was able to disguise its incapacity to properly manage its spending by borrowing $53b, ostensibly for post-pandemic recovery. However, in reality many other Government pet projects were funded under that heading. But now that borrowing has been nearly exhausted, the Government seems to be spending just as much, if not more, than ever, without showing it has the income to pay for it.
Having ruled out tax increases, the only reasonable conclusion remains that Labour’s current and future spending plans will be financed by increased Government debt – already about $73b – to be paid for by future generations.
Had Labour adopted a more rigorous approach to managing its spending ambitions over the years, and not caved in so easily to every interest group or ministerial vanity project that came along, it would not be in the mess with tax policy it is today. Its inability to say no to constituencies it considers possible supporters has now extended beyond its spending to its income as well.
The GST change may look superficially good, but is unworkable. It will not deliver anything like modest benefits claimed, while costing the Government billions of dollars in lost revenue, with only the vaguest of suggestions as to how the shortfall will be made up. It will also require a new bureaucracy under the Orwellian Grocery Commissioner to make it work.
It has been estimated that for poorer households, the gain from no GST on fresh fruit or vegetables may be as little as $2-$3 a week. For better-off households, who spend more so will benefit more, the net gain will be about $5 a week, barely the cost of a lettuce, although not a salad, which as a processed food, would not be GST exempt. But, given the likely high costs of administration, which will end up being paid for by consumers one way or another, the gains may be even more miniscule.
It is therefore difficult to escape the conclusion that Labour’s GST policy is far more a dog whistle to traditional supporters not to defect to the Greens or Te Pāti Māori in its heartland seats, than a policy it ever expects to implement in government.