National’s grossly irresponsible, unfunded tax policy is now dead.
Nicola Willis now needs to walk back her rash promise to resign as Finance Minister should the policy not proceed. She is lucky it has been mortally wounded before the election rather than after.
Following three weeks of pressure, if National had any credible evidence its new taxes could generate the revenues it claims — while simultaneously not fuelling inflation — it would have released it.
No one, not even Luxon himself, believes National’s numbers added up. Even if they did, National must know that introducing $20 billion of new foreign demand in the housing market would obviously fuel inflation.
Any tax cuts, extra Working for Families handouts or childcare subsidies you would have received from National next financial year would have disappeared in higher mortgage payments to the Australian-owned banks.
The same is true of whatever cash handouts Labour is promising.
Had Act or NZ First irresponsibly supported National’s policy, it would have created a permanent fiscal deficit leading ultimately to a full-blown economic crisis.
The outgoing Labour Government’s profligacy since 2022, despite the end of Covid lockdowns, has already made debt servicing the fastest-growing area of government spending.
As soon as 2026/27, annual debt servicing is expected to reach $10b, more than four times what Labour has budgeted that year for police, whose operational spending and real pay rates it plans to cut.
Worse, the $10b forecast for annual debt servicing assumes that all of Labour’s promised spending cuts go ahead, that there will be no tax cuts and that yields on 10-year government bonds won’t pass 4.7 per cent.
Yesterday, they were already 10 per cent higher than that, trading at lunchtime at 5.17 per cent.
Even assuming Labour’s $8b of spending cuts go ahead and there are no immediate tax cuts, it might be prudent for Treasury to whack another billion onto its annual debt servicing forecasts.
Treasury also needs to consider the implications, if any, of tax revenues since Christmas being billions below forecast despite yesterday’s GDP data from Statistics NZ suggesting the economy was never in recession and has been among the fastest-growing in the developed world since April.
If tax revenue isn’t tracking GDP the way Treasury expects, the fiscal outlook might be worse than thought even a few weeks ago.
One explanation could be that almost all the unexpected GDP growth was driven by net migration, mainly from China and India, being tens of thousands higher than expected.
As Richard Prebble explained on Wednesday, a net 100,000 new residents have arrived in just the last 12 months, roughly the population of Dunedin, without Labour making extra provision for infrastructure, housing, education or health spending.
Labour plans further net arrivals of 50,000 in the next 12 months and another 40,000 the following year.
National promises even higher immigration, which would keep headline GDP looking healthier through its first term even at the cost of falling GDP per person. That worked well for John Key.
NZ First’s rejection of National’s tax plan was made in typically obtuse terms.
In contrast, David Seymour spelled out Act’s in full detail, including identifying specific agencies and programmes to be abolished or butchered, rather than National and Labour’s vaguer commitments to ask the Wellington bureaucracy what it thinks should be cut.
Some of Act’s savings are tiny, such as the $4 million from abolishing the “climate change chief executives board”, which involves 10 senior bureaucrats meeting periodically to do no more than their day jobs.
Other cuts are much bigger. Who knew the “progressive home ownership scheme” costs nearly half a billion dollars a year?
Act’s spending cuts add up to $25.5b over four years. That’s on top of Robertson’s $8b of cuts, and a whopping $17b more than the extra $8.5b National will ask departmental chief executives to look for.
The age of entitlement for superannuation would start to rise gently from 2025, to 67. No new taxes are proposed.
Importantly, not all Act’s savings go to tax cuts.
Seymour promises only that every taxpayer would be at least a few hundred dollars better off each year, in contrast to Luxon’s more grandiose, unfunded numbers.
Provision is also made for increased spending on law and order, education and defence, above that promised by Robertson.
Crucially, the deficit would start to come down immediately, so that several hundred million dollars of debt servicing would be saved from 2024/25. Luxon’s unfunded tax cuts and welfare handouts would be clearly unaffordable, at least in the immediate term.
National has no one to blame for its tax-policy fiasco but itself.
The policy was clearly written without the benefit of serious research into either the revenue or expenditure side and — incredibly — with the help of lobbyists for the gambling and property-development industries.
When it was immediately pointed out as implausible, National could have made some minor amendments to its timelines, which voters would have understood given the fiscal crisis.
Instead, National claimed modelling had been done, which in fact seems not to exist.
National then decided to double down on its lie, smearing the professional reputation of the country’s most reputable economists, financial analysts and tax experts.
All National has achieved from the whole fiasco has been to raise serious questions about Luxon’s personal honesty and integrity and the rigour of its policy development process, and to reveal that it values reckless short-term political handouts ahead of ensuring the sustainability of the nation’s accounts.
After the last two years of Robertson’s particularly appalling fiscal mismanagement, voters are surely prepared for some degree of belt-tightening. Even the Greens are indicating they will compromise on their tax-cut policy given the fiscal outlook.
National promises a “full economic plan” in the next day or so. It will likely consist of another set of random bullet points gathered together from lobbyists and industry associations, similar to the “business growth agenda” brochures of the Key years.
Expect National to claim the “full economic plan” will so boost economic growth as early as next month that the recession it predicts for next year won’t eventuate.
When it then announces its “full fiscal plan” next week, just hours before voting opens, National will try to tell us that its numbers therefore all magically add up.
National has the election won. But such obvious dissembling is not the way to successfully launch a new government in difficult times.
- Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties, and the Mayor of Auckland.