SMELLIE SNIFFS THE BREEZE:How Labour might respond

SMELLIE SNIFFS THE BREEZE: How Labour might respond

by Pattrick Smellie

May 21 (BusinessWire) - Remarkable in the tidal wave of approval for Bill English's second Budget is the irrelevance of the Opposition Labour Party.

Such effective Opposition party behaviour as could be discerned around the Budget involved the dissident member of the government's own coalition partner, Hone Harawira of the Maori Party.

While Harawira's blast at the GST increase was reported as if Hone had broken ranks "yet again," no one really blamed the Maori Party if it let Hone off the leash after the betrayal of the apparently reasonable expectations of Tuhoe.

Thanks to the Budget, that is now last week's issue.

The Budget was a blinder - a document for the times. Encouraging of risk-taking in a fragile environment, and creating a bit of hope on the home front with meaningful cuts to tax rates in the "middle" New Zealand household, where the bread-winner may be bringing home $40,000 a year.

And at the same time, keeping government debt levels within completely acceptable parameters. The government's plan works best if the economy grows, but with net debt peaking at below 30% of GDP in the near future, there is a bit of room for slippage on the public debt front.

In a ground-breaking paper drafted last December before the Greece bailout, "Growth in a Time of Debt" by Harvard and Maryland University academics Kenneth Rogoff and Carmen Reinhart suggests that public debt is only a big problem above 60% of GDP, and you only fall off a cliff at 90%.

If New Zealand can keep core government debt to around 30% of GDP, and falling - very respectable compared to Greece's 115% public debt to GDP ratio - that's a very good place to be, especially because New Zealand's mainly private foreign debt, at around 130% of GDP, is way higher than is safe.

That high external debt, in turn, drives the Budget forecasts for a current account deficit stuck over the next four years at around 7% of GDP; uncomfortably high. But the Budget aims at that problem too. If other tax policy moves encourage domestic savings other than housing, a larger pool of private savings could start reducing private sector dependence on foreign sources of debt and capital.

The cut in the corporate tax rate is right for the times, too, and it matches the sensibilities of a right-leaning government that's keen on mining, just as much as tourism or the arts. For the many businesses out there looking for the economic recovery, but with no expectation that pre-2008 margins are on their way back, knowing we'll be at a 28% tax rate ahead of the Aussies from next April is a fillip timed for election year warm fuzzies.

To prove it, business lobbyists have switched from saying the government isn’t bold enough to now saying it's not only bold, but even "radical", which might be a tad over the top.

Bold has turned out to mean rational tax reform that takes the tax system back to something that looks much more like it did in 1989, when the company tax rate was last 28% and Roger Douglas and David Lange were in the course of tearing Labour apart. The top tax rate was last 33% as recently as 2001.

So these reforms are perhaps less bold moves than obvious ones. But even obvious moves need someone to decide to make them, and that has thankfully happened.

What these reforms don't do, though, is fix the big problem that economist Gareth Morgan called "the big Kahuna" and which Douglas tried to fix in 1987 with the flat tax package and a thing called the "Guaranteed Minimum Family Income".

That is the effort-sapping way the tax and benefit system immediately penalises beneficiaries who return to work, by double-taxing them.

At a certain point, the more you earn, the more you lose your benefit. It's a double-whammy because you're still paying tax on the income that's killing your benefit. For you, for part of your income, you could be paying 65 cents in the dollar or more, yet be poor. That's why it's called a "poverty trap" - the sort of thing a relevant Labour Party might care about.

These high effective marginal tax rates paid by people a benefit and paid employment remains the great unsolved puzzle in tax reform.

It is the problem that some government, some time, should try to address if they wish to be regarded as making truly radical changes to the tax system.

Perhaps Key would be bold enough to give it a go in a second term National-led government. He has proven adept at handling a wealth redistribution argument with this Budget - the "envy" headlines of earlier this week are gone, replaced by a predominantly supportive media reception to the Budget.

The Tax Working Group approach is a model for bringing the public along with a complicated argument.

But it is a big ask. The government has so many political bases covered now, why would it bother to go into such treacherous territory which has already crippled one otherwise functional administration in the late 1980s?

It would take a desperate kind of adventurer to head there. Perhaps as desperate as an irrelevant Opposition looking for something more compelling for voters than a compromised anti-mining platform and a legacy as the party that last raised GST by 2.5 percentage points.

In reality, it will never happen, but what a powerful call to old Labour values it would be to cloak something like the Big Kahuna in a package to capture the imagination of the traditional low-to-middle-income Labour constituency by removing elements of the tax system that conspire to keep them poor.

Infometrics economist Gareth Kiernan says in Budget commentary this afternoon: "The government’s biggest missed opportunity …. has been to take a more substantive change to the benefit system and its interaction with the tax system.

"The monolithic Working for Families system and the independent earner tax credit (IETC) both deserve to be scrapped. These policies are guilty of unnecessarily complicating the tax system and skewing the incentives to work."

As legacies of the Clark Labour government, it is undoubtedly a bridge too far for Labour under Phil Goff to scrap these programmes.

But the reality remains that Labour is grasping to look relevant in the wake of a Budget that, with or without a strong recovery, entrenches the government's reputation as a competent economic manager, and capable of delivering what Bill English always said would be a "fair" tax package - a test that it seems to have passed.

For Labour, its period in Opposition is about finding new, defining opportunities. Opposition is all about looking harder and being willing to rethink its own actions.

Until that happens, John Key remains a shoo-in.

(BusinessWire) 17:30:39

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