A National tax package framed by fear of the Labour machine

Wednesday, 30 August 2023

ANALYSIS: It’s taken 18 months and whole load of work since the initial iteration was announced, but National’s tax cut package released today is pretty thin sauce. It will be worth $14.6 billion over four years and is called tax relief, rather than tax cuts.

It is designed to give a little bit to everyone but hand the maximum possible out to swing voters, and maintain an appearance of what is in reality Labour-defined fairness.

Despite National’s political ascendancy over the past 18 months, on the income tax side this is a plan crafted almost entirely on Labour’s terms – an acknowledgement of how much Finance Minister Grant Robertson and the Labour machine have come to define fairness, particularly in regard to tax and the dreaded “tax cuts for millionaires”.

The hike from a 33% to 39% top rate of income tax rate and trustee tax, the former of which Christopher Luxon said National would scotch 18 months ago, and the latter which was introduced at the May Budget, will now both remain untouched in National’s first term should the party be elected.

The centrepiece of it is a mixture of lifting tax thresholds, increasing the in-work tax credit, increasing Working for Families abatements rates and introducing some means-tested childcare subsidies.

The effect of all that is for two working parents with children in childcare, they will be $250 better off per fortnight.

It is not a package that is really just about tax cuts, it's a package that is about using the existing tax system to leave more cash in the pockets of average earning households with the next effect that they will vote National.

As one would expect from Nicola Willis, it is a competently put together, it looks credible, and she was well across the details. During her presentation complete with slides, Luxon periodically hummed in fervent agreement.

To pay for it, proceeds from the Emissions Trading Scheme would be taken out of James Shaw’s Climate Emergency Response Fund (CERF), and foreign buyers would once again be allowed to buy houses but they would have to be over $2 million, and then they would have to pay a 15% tax. There are also some savings from the public sector and scrapping consultants. Online gamblers would be socked and so would would-be immigrants who will face more of a user pays system. Although it won’t really be user pays because the money is not used to pay their costs. Instead, it's just a tax slug.

Getting rid of Shaw’s CERF is definitely an arguable proposition and makes sense politically. National and Willis think that Government trying to effectively buy emissions reductions by picking winners or corporate welfare mucks up the price signals in the ETS, under which emissions are capped anyway.

Most of these taxes are so-so or represent shuffling money around, in the case of the ETS, from one use to fund tax changes. Three of them would be levied on foreigners or foreign companies.

Politically, it looks like a bit of a complicated sell. The headline figures look good, but when out on the hustings if people are asking Luxon or Willis how much money they might get, the answers could get a bit contorted depending on income, children, daycare, working for families and so on.

One of the advantages of opposition is the ability to keep things simple. This looks like a plan a Wellington econocrat would design, which it undoubtedly was.

Willis and Luxon made much of the fact that the maximum dollar amount gained in tax cuts would be the same for someone on $80,000 per year as it would be for someone earning 10 times that: $40 per fortnight per person or $80 per household.

That said, for those families in line for $250 per fortnight, facing big mortgage repayment hikes and expensive food and petrol bills, this will make a material difference.

That’s the income tax side. There are also a range of other taxes being scotched that hit National’s core voters: The bright line test for investment properties (an effective capital gains tax) will be reduced from 10 years to two years, interest tax deductibility on mortgage repayments for investment properties. The tax on imported fossil fuel cars will also be nixed but no details yet.

Labour has attacked National’s assumptions around revenue from the new foreign house buyers tax – some $750m per year. The assumptions for that are a stretch based on sales of $2m houses over the past three years. But that’s he said, she said. More potent for Labour will be the attack line of foreigners driving up house prices further, whether true or not.

What was much stronger was Labour’s line on National's war on talent – the new fees that would-be migrants will have to pay to come to New Zealand. That will be set at a maximum of 90% of whatever Australia charges for the same services. Australia, however, is very expensive at providing these sorts of services (it has one of the most expensive passports in the world for example)

But mostly there isn’t much for Labour to really get its teeth into because there isn't much there. What is there seems mostly credible. Claims of “voodoo economics” by Labour are theatric overreach – tallying up the numbers is bookkeeping, not economics - but the plan itself is narrow, modest and pretty tightly targeted.

It's a tax document about getting elected. It isn't a recipe for better growth, and it barely hands back two years' worth of bracket creep to voters, not the 12 years’ worth that has occurred since the brackets were last adjusted, nor the six years since Labour was elected.

But it is a plan whose modesty recognises the fiscal hole that New Zealand could find itself in when the books are thrown open. And helpfully for National, any holes found or errant assumptions can be quickly patched up in National’s full fiscal plan, promised after the Pre Election Fiscal Update is tabled.

It also sits out in an odd policy netherworld until that fiscal plan is released. Clearly there is going to be a pretty angry set of Government books in and money will need to be found somewhere. National is confident that its tax plans will be paid for on that basis and assumptions outlined today regardless of that.

This is not a slam dunk that will probably win the election for National. But it was well-packaged up and probably will be well-received.

The test will be what voters think, and anything else that may come up as it is picked over and debated over the coming days.

Correction: An earlier version of this story said two working parents with children in childcare will be $250 better off a week. The figure is per fortnight.