Labour's reform of tax and electricity may be destined to underwhelm supporters

Tuesday, 11 September 2018

Finance Minister Grant Robertson and Prime Minister Jacinda Ardern have said the Government will only make tax changes stemming from the tax working group to the next election, however the signals out this week may be that the changes are less significant than expected.

OPINION: As the reviews and working groups begin to report back to the Government, the degree of intervention on New Zealand's economy is becoming clearer.

Not much at all.

Already this week two major potential areas of reform saw developments which signal much less movement than was hoped for or feared, depending on your perspective.

Although there has been no official confirmation from the Beehive, there are signs that the tax working group has, for political reasons, stopped short of recommending a comprehensive capital gains tax.

Energy Minister Megan Woods said a report on electricity prices found the market was not working for everyone, however the report also found electricity companies were not making excessive profits.

* Review finds two-tier power market developing**

Finance Minister Grant Robertson has insisted the report of the working group, due to be released in the coming days, is only an interim one and has not settled the issue.

But after Labour argued for the best part of a decade in Opposition that the lack of a capital gains tax presented a shadow in New Zealand's tax system which favoured the wealthy over those who work for a living, the bar for major tax reform is only getting higher.

In the leadup to the election, as National ran attack ads claiming Labour would introduce a raft of new taxes, Jacinda Ardern effectively outsourced her party's policy changes to the tax working group.

If the expert panel does not recommend the change, it will be even more difficult for Robertson to introduce the tax than if he hadn't established the working group in the first place.

A day after the ground shifted on tax reform, Energy Minister Megan Woods released the interim report of the electricity price review, headed by Miriam Dean QC.

While the report could clear the way for minor changes which will benefit Kiwis who struggle to pay their bills (exposing prompt-payment discounts for what they are: a punitive tax on late payers), it will prompt a sigh of relief from the industry.

The report paints a picture of a two-tier market, with some customers benefiting from strong competition while the more vulnerable pay the price for it. Dean also highlights the increase in household prices over the past 30 years compared to business costs.

But make no mistake about the underlying message. Dean's report represents something of a clean bill of health for electricity generators, determining the industry is 'not making excessive profits'.

If anything, the report may signal a shift which would undermine the savings and specials extracted by consumers who change retailers frequently, which would be a strange way to help consumers.

How far we have come. Four years ago, Labour maintained that the electricity system was 'clearly broken' and 'extracting excess profit'.

It launched NZ Power, a plan to overhaul the electricity sector which was so radical it meant that when National sold off stakes in three major state-owned electricity generators, the shares fell into the hands of investors for much less than they might otherwise.

Although Labour has moved on, dropping the policy and replacing it with the winter energy payment which only help the electricity sector, the industry remained nervous about the review.

NZ First has maintained its rhetoric about electricity prices, making a 'full-scale' review of retail power prices a condition of the coalition.

It is hard to imagine the party anticipated a review as kind to the industry as it got.

There are deeply pragmatic reasons why the Government would follow the direction of the advice that it has been given this week.

A capital gains tax generates revenue when asset prices are rising. Although no-one can predict with confidence the future path for house prices or share markets, the general view is that assets across most sectors are currently highly valued.

Introducing the tax now would come with the same potential political pain as it would have a decade ago, but with little of the income in the short term.

The electricity market, meanwhile, is one where the Government needs to attract investment, with network company Transpower claiming in May that over the next 30 years, demand for electricity could double.

Part of that will come from distributed generation such as solar panels on residential, but significant industrial scale generation will also be needed.

If the Government was to take a hostile stance towards electricity generators now, any plans for new major investments would be shelved.

There are even whispers that to fulfil the Government's aim of 100 per cent renewable generation by 2035, the industry may stand back and wait for subsidies.

At a time of weak business confidence, the moves this week may prove that the feeling of policy uncertainty may be vastly overplayed by the Government's opponents.

But beneath the pragmatism are more fundamental questions. Where the Government has promised intervention, the signs so far appear to be little more than tinkering.

If it isn't for tilting the scales of the tax system towards income earners, or simply intervening to lower electricity bills for all, what exactly is Labour for?

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