We need to focus on global perspective, says Key

By Fran O'Sullivan

National's wannabe Finance Minister, John Key, is urging New Zealanders to use the remaining weeks of the election campaign to focus on what's going to happen over the next six years.

"There is a misperception that just because New Zealand is a nice place to live and a nice place to bring up children, that will be enough ... in a global world it isn't."

Key warns New Zealanders need to get their "mindset in the right place".

"The restructuring dividend from the 1980s and 1990s has been milked."

If the next Government does not set a much more aspirational vision, "we will get done like a dinner" by Australia.

"I just don't accept that the doubling of the income gap between Australia and New Zealand that's taken place over the last six years - $5000 to $10,000 of additional income - is a trend that we sit back and ignore."

Last week, migration figures turned negative and reaffirmed a big outflow to Australia.

"Australia's made it pretty clear they're looking for 20,000 skilled migrants - we'll be a very, very obvious target.

"At some point I think we have to wake up. Australia's not a hardship post. Unless we are prepared to do something about it, we're in serious trouble."

The former head of global foreign exchange for investment bank Merrill Lynch is completely comfortable talking about the type of environment New Zealand needs to provide to ensure talented Kiwis stay.

"I've never argued that New Zealand should be looking to replicate Wall Street salaries here - that's a big ask and a bigger economy. But we can put in place a framework so that people don't have to actually opt out of having a decent income by staying here."

Last week, National announced a $3.9 billion tax cuts package which will boost the incomes of two million New Zealand taxpayers over a two-step phase-in period beginning next April. The package - more generous than most predicted - replicates elements of the McLeod Taxation Review report which Finance Minister Michael Cullen rejected in Labour's first term in Government.

Incomes between $12,500 and $50,000 will be taxed at 19 per cent, between $50,000 and $100,000 at 33 per cent, and above $100,000 at 39 per cent.

Key says apart from the obvious - satisfying New Zealanders' wish to keep more of what they earn - the intention is to get the right incentives in place for people to achieve.

He claims all Labour is doing is "rolling out middle-class welfare" through the expansion of the Working for Families package it announced in last year's Budget to another 60,000 families.

"That's crazy."

Under National's proposal, 85 per cent of taxpayers will pay no more than 19 cents in the dollar in tax. The 19 per cent rate applies up to $50,000 (under McLeod the proposed 18 per cent rate cut out at $38,000). While National will keep the current 39 cents top rate - but shift the threshold from $60,000 to $100,000 - Key would want to ultimately drop the rate.

"At the moment, we've got 3 per cent of New Zealanders paying the top personal rate [under National's proposal]. But in my view, over time we should be looking to run a system that really delivers a two-step model.

"Flatter is better."

Yesterday's Herald Digipoll shows National's tax package has acted as a brake on Labour's poll lead. The governing party's lead had ballooned out to 13.7 points before National's policy was announced. But Labour still retained a 6.9 points' lead on those polled after the release and, with growing Green Party support, is in a strong position.

Unless National lifts its game, Key will not get an opportunity to implement his big-picture plans for at least another three years.

He concedes if National is to get over the line, it will need to sell its policies more strongly and show it has the ability to form a coalition.

"We'd like to obviously govern alone but we accept that the MMP environment is likely to deliver a coalition partner."

Asked why National does not "get real" and cut a deal that assures Act an electorate and National a centre-right coalition partner, Key replies: "They've always argued they are the party of ideas and if the ideas are strong enough that should get them over the line."

He maintains United Future is much more aligned with National than Labour.

"Putting the rhetoric of Winston Peters to one side - it seems to me his main arguments are we are a low-wage economy and taxes are important and getting export growth is important - I don't accept his argument that the package requires tremendous spending cuts.

"That presupposes the view Government spending is working."

In his own case, Key maintains he's making good headway in the business community - and publicly - differentiating his policies from Cullen's.

"This is really an election about two choices: those on the right who have a pretty aspirational view that New Zealand could do a lot better and we are going to tackle those issues head-on, and those on the left who are arguing much more now about redistribution.

"Michael Cullen's vision for New Zealand is a savings vision. We won't save our way to wealth. We will grow our way to wealth."

Several weeks ago, Key floated in the Herald a much more radical taxation agenda that would see a National Government examine whether New Zealand should adopt aspects of the Irish economic model.

Under this model, foreign investment greenfield ventures soared on the back of a targeted 10 per cent tax rate.

He stresses adopting a targeted rate for offshore investors is not National Party policy.

But Key does not resile from a big-picture approach.

He would ultimately like the proposed corporate tax rate to "be much lower than the one we've suggested." (30 per cent.)

The Government has attacked National's tax cuts plan as "fiscally unsustainable".

But Key contends it is "pretty conservative".

"We're still running surpluses of about 2.5 per cent of GDP. That's enough to fund all the day-to-day expenses of the economy. Enough to fund our entire contributions to the NZ super fund and fund some capital expenditure.

"The Government ran surpluses lower than this in its first three years so it's a bit laughable for them to say that somehow we are going to run New Zealand to wrack and ruin when, in reality, we are still running what are, in international terms, pretty large surpluses."

Key has a "to-do" list ready to lift New Zealand's overall performance - if he does manage to get control of the Government's finance levers after the September 17 election.

Cullen has taken issue with Key's belief that substantial fiscal savings - of the $4.1 billion scale National talks about - could be made by reducing Government spending.

Key ripostes: "No one questions whether state sector employees are working hard or not.

"It's a question of whether the structure is right - removing duplication and getting greater efficiencies."

Where Key will score points with the business sector is his desire to push faster with infrastructural reform through using private sector partnership models.

He also wants to move faster than the current Government to substantially reform the Resource Management Act.

Key concedes business probably expected National to have announced it would drop the corporate tax rate from 33 cents to 30 cents in the dollar well before April 2008.

He will not directly respond to the Herald's suggestion National is simply "vote-buying" by instituting personal tax cuts first ("it's a sequencing matter").

"It's not a perfect outcome from their point of view but it's a step in the right direction and our intentions are quite clear."

Key points to problems with the corporate tax base such as the leakage to Australia.

"We need to wake up and realise that balance sheet gearing, transfer pricing and thin capitalisation rules really challenge our corporate tax base.

"We have to realise that the global trend is towards lower company tax rates ... they are withholding taxes and simply reflect the cost of capital.

"But if we want to attract that capital, then that's necessary.

"In my view, we need a lower company tax rate. If we can bring it forward we will. But, realistically, it's probably April 1, 2007.

"But we won't do that unless we are comfortable that the monetary and fiscal considerations at the time allow us to."

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