Fran O'Sullivan: Key could prove a point with some bold tax ideas

Prime Minister John Key could confound the critics if his Government develops a proposal to create New Zealand as a global finance administration centre.

Right now Key faces charges that he has lost his mojo as he opts for "play safe" approaches in order to win the next election. He is under pressure to pull a game-breaker out of the hat to scotch the growing feeling that National is simply coasting on its high popularity ratings.

Behind the scenes the two task-forces investigating capital markets and tax reforms are taking a look at whether a major new industry could be created here to offer "back-office" services to the international finance sector.

The theory goes that by offering preferential tax breaks to major financial and insurance firms to re-situate their back-office services here, thousands of jobs would be created to keep young Kiwis in New Zealand.

Key himself promoted this "game-changing" policy when he was National's finance spokesman under previous leader Don Brash. He had seen first-hand the positive job-creation effects after he diverted some of Merrill Lynch's operations to Dublin to take advantage of the low corporate tax rate the Irish Government used as bait to get new industries into Ireland.

Back then critics scoffed at the proposal as running counter to the fair and equitable mantra that underpins New Zealand's tax policies. But it is understood that international consultants Oliver Wyman - who have investigated the proposal - believe New Zealand has a unique advantage for back-office services as it straddles US and Asian time zones.

There are suggestions that Key himself asked the taskforces to take a look at the proposal. But if it is to fly, it will take all of the Prime Minister's undoubted salesmanship to get it over the line: First by convincing New Zealand-based companies that it is in the country's overall interest to use foreign funds or offer financial firms lower taxes than they enjoy to put greenfields investment here and, second, to convince the firms to come here in the first place.

Ironically Key has told National Party insiders he won't jeopardise his chance of winning a second term in office by burning off his political capital on risky strategies.

The Cabinet's weaknesses in political management came in for scrutiny when the PM fronted up to an in-house National Party gathering after last week's fiasco over the free-to-air television rights for the 2011 Rugby World Cup.

Key's "trust me" approach is difficult for party insiders - and Cabinet colleagues - to contest given National's persistently high ratings in the polls. At party meetings and in-house briefings to the business sector, the Prime Minister repeatedly makes the point that mishaps like the television rights kerfuffle are basically political sideshows that voters will discount by the time the 2011 election rolls around.

But there are murmurings within the ranks from those who want Key to demonstrate he does have a plan to reboot the economy as it moves out of recession and has not lost the political energy to implement the type of game-changing policies he used to enthuse about before becoming the leader of the National Party.

Business leaders applauded the Key Government's fiscal stimulus package which softened the impact of the global financial crash. But they are also now starting to murmur that it is time for Key to get the turbo-charger out.

At issue is whether the Cabinet opts for tinkering around the edges of current policies or drives hard to make the changes that will put this economy on an internationally competitive footing.

The first chance for Key to demonstrate he has not lost his mojo will come when the respective tax and capital markets taskforces report.

Some crunchy issues are on the table, including new capital gains and/or land taxes and an increase in the GST rate. But (so far) Key and Finance Minister Bill English have not shown any appetite for significant change. Key has scotched capital gains taxes and English is taking a defensive line (we'll move if Australia does).

Underlying this is the drain on public finances caused by the burden of servicing our growing debt pile.

English has said it will take two to three decades for our public finances to recover from the recession. But neither Key nor English can afford to adopt a head-in-the-sand approach. It is inevitable that if they do not move to get the debt down quickly it will simply blow out further because of the impact of other recessions which seem to hit this economy every 12 to 15 years.

Selling equity bonds in state-owned enterprises like the power generators - rather than privatising - would release much needed cash to get the debt under control. And it would be another sign that Key has not lost his mojo.

fran.o'sullivan@nzherald.co.nz