Tax cuts need to be put on hold until we can afford them - Liam Dann

Prime Minister Christopher Luxon, along with senior ministers Chris Bishop, Nicola Willis and Simeon Brown, risk burning National's political capital with miserly Budget calls, writes Liam Dann. Photo / Alex Burton

OPINION

The Government needs to stop trying to fix the economy with one hand tied behind its back. It’s time to bite the bullet and put tax cuts on hold until we can afford them.

Even if it finds the money – digging down the back of the sofa for disability allowances and under the car seat for police funding – it is madness to pour cash back into the public’s pocket until inflation is beaten and interest rates are on their way down.

Tax cuts are stimulatory – which means, in terms of the fiscal impulse, the Government will be pushing back against its own austerity measures.

To put it another way, the Government is hitting the fiscal brakes with one foot at the same time as putting the other on the accelerator.

Arguments from the Prime Minister and Finance Minister that cuts to government spending will offset the stimulus are circular. They are an admission that tax cuts will water down the disinflationary benefits of all the spending cuts.

Fiscally neutral (as the IMF this week warned that cuts will need to be) isn’t actually good enough.

The point of government department budget cuts should be to remove unproductive stimulus from the economy, reduce inflation and help the Reserve Bank to get interest rates down faster.

There is no way pouring billions of dollars back into public pockets this year won’t make the Reserve Bank’s (RBNZ) job harder.

“The planned personal income tax relief is targeted predominantly at low and middle-income earners and families with children, which have a higher propensity to spend,” the IMF said in its report on New Zealand’s economy.

The merits of austerity as an economic policy are always controversial, to say the least. Critics of austerity are quite right: cutting spending in a recession does make things worse.

But as ANZ economist Miles Workman has pointed out: “This isn’t your run-of-the-mill, run-for-the-hills recession that we’ve seen through times of financial market and economic crisis. Rather, it’s a policy-induced slowdown that’s part of the necessary transition from too much fiscal and monetary stimulus in the wake of the pandemic.”

Apart from inflation-busting, the other good reason for tightening up government spending is basic fiscal prudence. We need to narrow the deficit and get the Crown accounts back into the kind of shape that could withstand another external shock – when it inevitably arrives.

The tax cuts make that so much harder too.

Perhaps National is wedded to tax cuts for ideological reasons. It might be clinging to the contentious “trickle-down economics” idea that lower taxes drive greater productivity, which will eventually boost Crown revenue with more economic growth.

But if that were the case, these cuts shouldn’t be targeted at landlords and low to middle-income earners. There should be tax breaks for R&D investment, tech start-ups and investment in the productive end of the economy.

National projected the cuts to cost almost $15 billion across the next four years – that’s before you throw in $2.8b it will cost to give landlords back their tax breaks.

That kind of money makes a huge difference to social spending but is not enough to deliver any rapid productivity gains.

Instead, National risks burning its political capital with miserly Budget calls.

I am aware that there is nuance to issues such as the disability allowance cuts and that they won’t now be as severe as headlines first suggested.

Some have described that as a backdown.

The current Government policy seems to be: cut first and then walk back anything that creates too much negative publicity. In the corporate world, this is a strategy known as “move fast and break things”. It was the motto at Facebook for many years, back when “disruption” was also a big buzzword.

If you want to effect rapid change in your organisation, don’t sort out all the details first. Make the big radical calls and then let your staff resolve any issues it creates afterwards.

I have some sympathy for this approach because Labour took too long to resolve details and ended up failing to deliver the big change it promised.

But from a political point of view, trying to defend funding cuts for an autistic girl’s swimming lessons is a terrible starting point for a debate.

Big staffing cuts for the police and Ministries of Health and Primary Industries also appear to go well beyond notions of “woke and wasteful bureaucracy” that were touted on the campaign trail.

Obviously, cutting spending and taxes were both central planks of National’s election policies. They need to follow through on those promises.

When you consider the inflation we’ve all just lived through, there is an element of fairness to adjusting the tax brackets.

But it makes sense to take a breath. Focus on the immediate task at hand: fiscal responsibility. Help the RBNZ get inflation under control and interest rates back down.

A delay until July next year would give the Government an extra $4b of breathing room to get its cost-cutting back into the realms of the prudent and sensible, rather than looking cruel and miserly.

It seems unlikely the voting public would punish National for the delay in 2026. If anything, the cuts will be fresher in the public consciousness and, hopefully, the economy will be back in a much better balance.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.