Danyl McLauchlan analyses the election promises parties have made to voters to tackle the cost of living crisis in an online exclusive story.
When most of us think of inflation we think of higher grocery prices, higher rents, paying more at the petrol station: a general increase in the cost of living. But the majority of economists see things differently: to them inflation is when the value of our money declines. It seems like prices are going up, but what’s really happening is that your salary, and the cash in your bank account, is worth a lot less than it used to be. So is all the money in your savings and your retirement fund.
Inflation is one of the central problems in macroeconomics. A period of high inflation is a crisis in which wealth is transferred from people who have saved money to people who hold high levels of debt: both the savings and the debt lose value. It’s often advantageous to the rich, who hold high levels of cash debt and it’s a tax on the poor, who are the least able to adjust their incomes to match rapid price rises.
British economist John Keynes suggested three mechanisms for combating inflation. A government could reduce spending, raise taxes or increase interest rates. All of these have the effect of sucking money out of the economy. By making money scarcer you’ve increased its value. Viola: you’ve solved inflation.
Unfortunately, all of these solutions are deeply unpopular with the public. The 1970s was a prolonged period of high inflation across most of the OECD – it hit 20% in New Zealand during the oil crisis – partly because political leaders feared the voter backlash from spending cuts, higher taxes or high interest rates. The cure would be worse than the disease. At least for their careers.
During the neoliberal revolution of the late 20th century a consensus formed that inflation should be solved by central bankers raising interest rates. The bankers weren’t directly accountable to the voters so they could – and did –make the decision to plunge an economy into deep and sustained recessions in order to tame inflation. And this was such a successful technique that we’ve enjoyed very low rates of inflation for three decades.
But now here we are: ever since a bout of Covid-era money printing combined with a spike in oil prices in early 2021 our inflation rate has been outside the target band of 1-3%. And the Labour government’s decline in popularity has correlated strongly with the subsequent cost of living crisis. Inflation kills governments.
What are the parties’ solutions?
When Chris Hipkins succeeded Jacinda Ardern as Prime Minister he promised to focus on inflation. “Bread and butter issues”. And he’s done exactly that. Labour has a 10-point plan to help people deal with the cost pressures caused by high inflation.
So far, they’ve boosted Working for Families, introduced subsidies for public transport and removed the $5 prescription charge. They’ve promised to take GST off fresh and frozen fruit and vegetables; extend the early childcare subsidy to two-year-olds, roll out free dental care for under 30s and they’ve still got a couple of as yet unveiled cost-of-living promises to go.
- Winners: Lower- and middle-income families with children. Potentially under 30s who need dental care. No one thinks the GST exemptions will be passed on to consumers, and it’ll take at least three years for the government to grow the number of dentists to deliver on their promise. But the combination of free prescriptions, free- and half-price public transport for children and under 25s, respectively, and the targeted transfer increases will make a material difference to those households.
- Losers: Everyone who pays income tax, but we lose in a quiet, sneaky way. The government has decided not to shift the brackets on the income tax thresholds, so they can keep giving us incremental tax increases every year as inflation lifts our earnings up into the higher brackets.
National has also focused on the cost of living and they’re doing so via a massive $14.6 billion dollar tax package which claims it’ll deliver $250 a fortnight to the “average Kiwi household with kids”.
A single earner on $60,000 would get $50 a fortnight. This has been described as a tax cut policy, but they’re really just raising the tax brackets to account for the past 13 years’ worth of inflation. And they’re delivering a lot of the money via Working for Families and other tax credit transfers rather than tax cuts – this allows them to target the package at middle-income swing voters and avoid the standard Labour critique that National is offering tax cuts for the rich (which they’re saying anyway). And some of the funding comes – directly or indirectly – from scrapping Labour’s new public transport subsidy.
- Winners: “The squeezed middle”. Specifically, the estimated 85,000, predominantly women voters with young families that both the major parties have identified as available to them. The combination of bracket shift and increased transfers is almost certainly larger than the transfers and subsidies they get under Labour. It’s just not clear that National can afford the policy.
- Losers: Well, the prescription subsidies will go – they’ll be used to pay for cancer treatments. So will the public transport subsidies, so if you have chronic health conditions and kids who take the bus a lot, these will add up to a significant cost.
The Greens want to implement a wealth tax. They’ll levy 2.5% tax on assets over $2 million owned by individuals or $4m owned by couples, and impose a 1.5% tax on trusts. They’ll lower the current 39% top tax rate to $120,000 and introduce a new high rate of 45% on incomes over $180,000. They’ll use all this additional revenue to fund a tax-free threshold of $10,000. That’ll give most income earners a $1500 tax cut. But if you earn more than $125,000, you’ll be paying more, and if your salary is higher than $180,000 you’ll pay a lot more. And they’re promising universal free dental care, rather than the free-for-under-30s promised by Labour.
- Winners: Most households would benefit from this package – although the gains are modest for middle income earners. But lower income households – especially those with children see absolutely massive income gains, elevating them to middle income status solely through transfers.
- Losers: The rich, who will pay vastly more tax than they currently do, both via the income tax hikes and the wealth tax. It’s also worth pointing out that Chris Hipkins has explicitly ruled out the wealth tax without which the Greens package is unaffordable.
Act’s policy manifesto is titled “A Time For Truth”, and the unsurprising truth is that Act plans to dramatically lower taxes, especially for high income earners, while they’ll actually increase taxes for those on lower incomes.
They’ll offset this with a low and middle-income tax credit of about $800: everyone on less than $48,000 would probably break even, while those on over $70,000 will enjoy large cuts, scaling upwards with your level of income. They’re also offering a carbon dividend, taking the income from the ETS and paying it out to the public. It’ll return each taxpayer about $200 a year.
Overall, this’ll cut taxes by $34 billion over a four-year period: Act plans to fund this via gigantic cuts to public spending.
- Winners: Everyone would get the carbon dividend. High income earners would get huge reductions on income tax. The Departments of Defence and Corrections – Act plans to give them both large funding boosts.
- Losers: The rest of the public service: Act plans to issue a stop-work notice as soon as the government is formed, shutting down divisions and projects they don’t feel add value, and then move on to the abolition of entire departments and ministries.
Te Pāti Māori’s policy package is an even more radical combination of the Labour and Green proposals. They’ll remove GST from all food – and, like Labour they have a very vague guarantee that they’ll do “something” to ensure this gets passed on by the supermarkets.
They’ll create a $30,000 tax-free income band, and they’ll introduce new income brackets at $180,000 and $300,000, charging 42% and then 48% respectively. They’ll introduce an escalating wealth tax starting at 2% on fortunes of $2 million and increasing to 8% at $10 million. There’s debate about whether wealth taxes cause capital flight, but I don’t think you’ll find a single economist who thinks an 8% wealth tax won’t cause a torrent of capital to flee the country.
They’ll also increase the company tax rate and institute a land banking tax, a foreign buyers tax and a ghost house tax.
- Winners: As with the Green policy, nearly every household in the country would see a net gain from this policy but the majority of the transfers are to lower income households, a cohort where Māori are overrepresented.
- Losers: The rich. Foreign based corporations. Also, a wealth tax of 8% is very high. Economists argue about whether they cause capital flight at 1%, or 3% - but if you’re taking 8% of someone’s net wealth every year, most of the rich will transfer their taxable assets to another country immediately, and you’ll probably have quite a deep recession.
Also worth noting: none of these policies directly address inflation. Instead, they’re attempting to mitigate its effects by moving money around the economy to help people meet price increases, without doing anything to slow down those increases. While both major parties insist they’ll “tackle inflation”, neither are proposing dramatic net spending cuts or tax increases. They’re both hoping that the Reserve Bank will solve inflation for them. The official cash rate is 5.5% and the bank has indicated it’ll “remain at a restrictive level for the foreseeable future”.
The bank also notes that the global economic outlook is very gloomy. There’s a lot of scepticism among economic commentators about this year’s election, which has turned into a very lavish bidding war for votes. Whoever wins in October will struggle to deliver on the tax cuts, transfers or government services they’ve promised. They’ll either find the money through tax increases, spending cuts or borrowing on the international markets. The latter is the most politically palatable option – but that will be inflationary. If that comes to pass, an election campaign focused on helping households during the cost of living crisis will have made the crisis worse.
