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Home / Business / Economy

<i>Liam Dann</i>: Key's time to pick a winner

Liam Dann
By Liam Dann
Business Editor at Large·Herald online·
22 Jan, 2010 03:00 PM4 mins to read

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John Key and Bill English must decide which tax changes they can make without alienating their right-wing support base. Photo / Greg Bowker

John Key and Bill English must decide which tax changes they can make without alienating their right-wing support base. Photo / Greg Bowker

Whatever you think about the pros and cons of the ideas put forward by the Tax Working Group, it has put the ball firmly back in the Government's court.

How John Key plays this one is likely to be the defining point of his current term in office.

Thus far he has built a large base of support by trading and hedging his way through the political milieu. It's been the kind performance you'd expect from someone with his professional background. A good investment banker or currency trader is highly skilled at assessing risk and then picking winners.

Probably more surprising is that Key has turned out to be quite good at smiling politely, making goofy jokes and pretending to be an ordinary bloke.

He is succeeding as a grass roots politician while continuing to play a high level strategic game. This combination has seen his popularity soar to historically high levels.

But the populist act is wearing thin for many of his core supporters who fear the window of opportunity for making significant structural change is slipping by.

So one suspects it is on the issue of tax reform that Key and his team will have to bite the bullet and upset a few potential voters. If not they risk alienating many of the people who helped put them in to power.

It's a fair bet that Key and Finance Minister Bill English don't need much convincing on the economic merits of proposals in Wednesday's report.

This is supposed to be a centre right Government after all.

It campaigned on a programme of tax cuts and while those were stalled by the global financial crisis, it is still presumably a Government that believes lower taxes are a good way to encourage economic progress - both individually and collectively.

If Key wasn't Prime Minister he'd be exactly the sort of bloke a National government would put on a taskforce to come up with these sort of proposals.

And Bill English has always worn his credentials as a centre-right politician proudly on his sleeve.

Both are aware of the problems that the national obsession with property is creating - we owe the banks too much, we're not investing enough in capital markets and in the productive end of the economy.

Worst of all we are inflating house prices out of reach of our own children.

But the economic pros and cons of the proposals are one thing. The political pros and cons are another.

In investment banking terms Key has to put together a high stakes deal, with a complicated structure which requires serious thought about how the risk can be hedged.

Then he needs to sell that deal.

Before he goes public he needs to do some cost benefit modelling on all the proposals. So far he has done this sort of thing well.

But with an issue like the Maori flag at Waitangi the equation is straight forward.

It is an emotive issue but one that doesn't materially change the lives of those it upsets.

They'll get over it and you can bank the good will you get from a chunk of the public who might not normally consider voting for you.

But tax is material to everyone.

The risks are much higher and the equation is more complex.

Is it more politically advantageous to upset a small group of voters a lot or upset a lot of voters a little bit?

In other words how will the fallout from a GST rise compare with that from a targeted tax on the risk-free rate of return for investment properties.

Who are the voters that each proposal is likely to most upset? How upset will they be and for how long? How easily can they be compensated?

Is the property sector resigned to changes in rules around depreciation on rental housing? If so will that deliver enough revenue to allow significant changes to personal or corporate tax rates?

And how much change does Key think he needs to deliver in order to satisfy his core supporters on the right of the political spectrum. What are the risks in alienating them?

Hopefully Key is also loving every minute of this. It is the kind of high-stakes stuff that investment bankers live for. Let's not forget the rewards are also very high.

If he manages to weight this reform package just right he could go into the next election with poll ratings intact and a much more solid foundation on which to build momentum for change in a second term.

He isn't in this game for the money. If he is in it to go down in history as an important Prime Minister - the kind that effects substantial change - then his moment of truth is nearing.

Discover more

Opinion

What are your views on the Tax Working Group recommendations?

20 Jan 12:11 AM
Economy

Govt wary of plan for big change to tax

20 Jan 03:00 PM
Airlines

Property listings hurt by tax speculation

21 Jan 06:56 AM
Opinion

<i>Keith Rankin:</i> Tax reform? Watch for the broken glass

21 Jan 03:00 PM
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