Nicola Willis’ credibility is on the line as she finalises National’s tax policy, due in under three weeks.
In early March 2022, Christopher Luxon and finance spokesman Simon Bridges promised big tax cuts to get National on the radar.
A week later, Bridges quit. Willis, already deputy leader, followed Michael Cullen and Bill English in taking finance.
National’s March 2022 promises were based on Treasury’s Half-Year Economic and Fiscal Update (HYEFU) in December 2021, at the end of the lockdown era.
The HYEFU, required by Ruth Richardson’s landmark Fiscal Responsibility Act 1994, was signed off by Finance Minister Grant Robertson and Treasury Secretary Caralee McLiesh as incorporating everything they knew in late November 2021.
It reported annual growth of 5.1 per cent to June 2021, and forecast the economy would grow modestly in 2021/22, before growing by 4.9 per cent in 2022/23 and another 2.2 per cent this financial year.
Today’s unemployment rate would be just 3.3 per cent.
Inflation would already have peaked at just 5.1 per cent and fallen to 3.1 per cent this year. Hourly wages would have risen by 50 per cent more than inflation.
Homeowners would be enjoying falling interest rates, and house prices would have risen 10 per cent in 2022 before stabilising, but not falling.
Exporters would be a bit grumpy because, despite falling interest rates, the dollar would be 10 per cent higher than it is today. But groceries and trips to the Gold Coast would be cheaper.
This would all have increased tax revenue and reduced pressure on spending, putting the books into surplus in time for the election.
Luxon and Bridges could be forgiven for thinking tax cuts would be plausible by now — but more fool them for trusting Jacinda Ardern, Robertson or Chris Hipkins to deliver.
By Robertson’s sixth and probably final Budget this May, everything looked much worse.
Growth was expected to remain low right through the next parliamentary term. Unemployment would reach 5 per cent and stay around there for at least four years.
The only good news was that inflation would be down to 3.3 per cent by June 2024, although interest rates would be higher for longer. The Budget Economic and Fiscal Update admitted house prices had fallen and would continue to fall, as would the dollar.
Robertson was forced to concede that he couldn’t get the books into the black until 2026.
His cash position was even worse.
In December 2021, Robertson thought his cash deficit would be “just” $8 billion this financial year. In May, he admitted it would be more than three times higher, at $26.9b.
The debt outlook had also deteriorated.
In December 2021, Robertson thought net core Crown debt would be “just” $138b by the 2026 election. In his Budget in May, he picked it would be $180b, more than 30 per cent higher.
In less than four months, everything has got much worse yet again.
Robertson’s Budget assumed tax revenue had been rising since Christmas and would keep improving through the rest of the financial year.
Sadly for him or whoever replaces him, the tax hasn’t turned up.
Since February, Robertson has pulled in between $1b and $2.3b less each month than he kept hoping for. Even without playing silly buggers with the Y axis, his revenue graph is awash with red ink.
Robertson now needs tax revenue in June to have been a record $12b to meet even his downwardly revised forecast. We’ll find out the truth when Richardson’s disclosure regime forces him and Treasury to unveil the Pre-Election Economic and Fiscal Update (PREFU) on September 12.
Below-forecast tax would leave Robertson billions short of revenue, while expenses are rising. That’s a problem in itself. Worse, it suggests much lower economic activity since Christmas than expected in May, despite inflation being higher.
Winston Peters — who points out his experience as Jim Bolger and Jenny Shipley’s Treasurer and Deputy Prime Minister through the 1997/98 Asian Financial Crisis — wasn’t lying when recently warning of a $20b fiscal hole.
If anything, Peters — who NZ First insiders say would want to be Treasurer rather than Foreign Minister in a National-NZ First Government — was too optimistic. Westpac economists now say Treasury will need to issue $135b of bonds over the next four years. That compares with the $120b Robertson thought he would need in May and the “mere” $100b that was picked in December.
Willis has already scrapped Luxon and Bridges’ promise to abolish the 39 per cent tax rate on income over $180,000, recognising it had become fiscally irresponsible and politically lethal.
Likewise, she has limited their promise to raise tax thresholds to account for inflation since 2017 to the 11.5 per cent needed in March 2022, half of what is needed now.
Even that is now fiscally dubious.
The great former leader of the Business Roundtable, the late Roger Kerr, said the only real tax cut is a spending cut. If a government cuts your tax but not its spending, all it has done is increase the tax you’ll have to pay in the future. Alternatively, if it cuts spending but not this year’s tax rates, it has in fact cut your tax burden by reducing what you’ll need to pay the next year and beyond.
The great reformers of the 1980s and 1990s were divided on the timing of tax cuts.
Supply-siders like Ronald Reagan and Roger Douglas believed tax cuts paid for themselves by boosting economic activity. That turns out to be true only if tax rates are very high, as in 1984 New Zealand.
Fiscally conservative monetarists like Margaret Thatcher and Richardson knew inflation and debt were the true enemy. Tax cuts are the reward for good economic policy, not the genesis.
In particular, tax cuts or handouts targeted at the poor and middle class, which are all spent on consumables, are to inflation what kerosene is to a bonfire.
Richardson never cut tax because she knew it would have worsened the fiscal deficit, undermined the fight against inflation and caused higher interest rates. Thatcher even raised taxes in the early 1980s in her battle against inflation and debt.
Only after defeating inflation and achieving sustainable surpluses did their policies deliver tax cuts, in their governments’ second terms.
Hopefully, Willis follows the great women of the reform era, not the men. Tax cuts in 2023/24 would be insane. Tax cuts in 2024/25 would have to follow and cost no more than whatever cuts to wasteful spending Willis actually delivers in 2023/24, rather than merely promises.
Most prudently, tax cuts would be best left for Willis’ re-election Budget in 2026.
- 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.