“Almost a definition of irresponsible election promises”

National’s tax relief package announced yesterday is only half the story.

The $3.1 billion package delivers tax relief to a range of middle-income families and tax relief for property investors.

It will cancel Labour’s planned fuel tax hikes, remove the Auckland Regional Fuel Tax, cancel the new tax on services like Uber and Airbnb, and ensure the same GST rules apply to all services.

National says it is fully funded by a series of tax moves and spending cuts that it also announced yesterday.

But leader Christopher Luxon and Finance spokesperson Nicola Willis resolutely yesterday went beyond that and tried to avoid talking about what is expected to be a big blowout in the Government’s books, which will be revealed when the Pre-Election Economic and Fiscal Update is released on September 12.

One leading economic commentator yesterday described the refusal to address the blowout as almost a definition of irresponsible election promises.

Finance Minister Grant Robertson called the package “voodoo economics”.

That term was famously used by US Vice President George H. W. Bush to describe President Ronald Reagen’s proposal during the 1980 presidential primaries for unfunded tax cuts.

National says the cuts will come from savings, new taxes on online gambling and foreign home buyers, and introducing user pays for visas.

It has also included ending the depreciation on commercial buildings, but Labour has already claimed that as its own revenue-raising policy.

National says it can cut $594 million annually from public service back-office functions along with cutting $400 million annually in spending on consultants.

These cuts would be on top of the $506 million annual savings in departmental baseline spending announced by Finance Minister Grant Robertson on Monday.

But both Labour and National have yet to detail how or whether they will make cuts in government spending to accommodate the anticipated blowout in the deficit to be revealed in the Pre-Election update on September 12.

The alternative to substantial cuts would be to push the deficit out and incur the extra borrowing that would go with that.

From yesterday’s press conference, it would seem either option might be possible.

In an unusual approach to economic management, Luxon said the tax plan was separate and distinct from the spending plan.

“What I’m saying to you very clearly is what we’re waiting for is PREFU (the Pre-Election Economic and Fiscal Update) on September 12,” Luxon said.

“We’re going to look at the fiscal situation at that point.

“That’s why we’ve decoupled our tax plan from our fiscal plan.”

But after PREFU National will have to re-couple the two together if they are to have any economic credibility, and that means they will have to either define where further cuts will come from or admit defeat and abandon the current 2025/26 target to get the Government accounts back into surplus and thus stop adding to the country’s indebtedness.

Already, we know that the deficit has blown out by $2 billion since the Budget.

And Treasury has said — and Beehive sources have confirmed — that it will have gone further into the red since the May accounts which revealed the $2 billion figure.

It could easily be out to $3 billion — or more.

National’s problem now is that after Labour found $506 million of public sector cuts on Monday and National found another $594 million yesterday, it is starting to get to the point where there will be less and less to cut from the public sector without cutting into its muscle and bone.

Of course, If National had to do that, Labour would be delighted.

Yesterday, the Public Service Association (PSA), which is not a disinterested party in this debate, raised some questions about what agencies National had said would be exempt from any cuts.

“While some agencies are excluded, like Te Whatu Ora, Corrections, Education and Oranga Tamariki, many others are impacted,” said Duane Leo, PSA National Secretary.

“For example, the Ministry of Social Development supports people doing it tough, MPI keeping pest species and animal diseases out of the country, Customs protects our borders, MBIE drives economic growth, DOC safeguards our much-loved iconic species, and Environment which is focused on dealing with climate change and pollution.”

National’s finance spokesperson Nicola Willis singled the Ministry for the Environment out as one agency that had tripled its costs under Labour.

But what she should have acknowledged was that much of the reason for that was the work that had been involved in the development of the new package of three bills to replace the Resource Management Act.

The Natural and Built Environments Act alone is 945 pages long, but National proposes to repeal it and start all over again.

In its explanatory notes issued to media yesterday, National said to make savings, departments would be required to:

• Reduce advertising and public relations spending
• Stop work programmes not supported by the incoming Government, “for example, income insurance scheme, Fair Pay Agreements, Industry Transformation Plans, and Labour’s RMA replacement)
• Leave some job vacancies empty and stop some new hires with a view to reducing headcount in nonessential back-office roles such as communications and policy.
• Retire working groups, taskforces and other functions made obsolete by the change of Government
• Stop programmes to refurbish offices or upgrade property leases

National claims its cuts, along with new revenue measures, will fully fund its proposals.

But there are already questions about its proposals to levy a 15 per cent tax on foreign buyers of houses.

The party estimates that it will bring in $740 million a year, which would require a total of nearly $5 billion of house sales in the above $2 million segment of the market.

Currently, on Trade Me, there are 111 properties for sale at over $2 million in the Queenstown Lakes district; the median property price is $3.2 million.

Using that as an average, National’s policy suggests that as many as 1,500 overseas sales would be required yearly to reach its revenue target.

Housing Minister Megan Woods said yesterday that before Labour imposed its foreign house buyer ban in 2018, 4120 homes were sold yearly to foreign buyers, though not all were valued at over $2 million.

Furthermore, Revenue New South Wales has had to withdraw a similar tax because it was inconsistent with a number of tax treaties that Australia has.

Those treaties include agreements with Finland, Germany, India, Japan, Norway, South Africa and Switzerland.

But it is the broader implications of the economic slowdown and its effect on the Government’s fiscal position that National did not address yesterday but which it will have to deal with before the election when surely it will be asked by Labour to “show me the money.”

Willis seemed to suggest that was irrelevant.

“We want to assure New Zealanders today who are watching this, your tax relief is coming no matter how badly Labour has wrecked the joint,” she said.

The economic commentator and former Reserve Bank economist, Michael Reddell, was scathing in response to that.

“Seems almost a definition of irresponsible election promises when the starting fiscal deficit is so large,” he tweeted.

On his “Croaking Cassandra” blog, Reddell said: “The overall argument – ‘this isn’t our fiscal plan, come back next month for that’ doesn’t really wash.

“It might if the Budget now was pretty near balance or even in surplus. No one would, or perhaps should, be very worried about modest changes in a comfortable fiscal position.

“But we don’t have a comfortable fiscal position.”

The Budget Economic and Fiscal Update forecast the 23/24 deficit at $7.56 billion, only tracking up to a very modest $560 million surplus in 2025/26.

But we already know that the Government accounts were running at $2 billion below that forecast in May and are now likely to have blown out by significantly more.

Unless the increased gap is closed in this Budget year, it will ripple through the coming years and postpone the day when the country gets back to surplus.

The IMF report on the New Zealand economy published on Tuesday warned that fiscal policy faced a challenging year ahead, with pressing spending needs toward rebuilding and alleviating the high cost of living.

“New spending initiatives should be carefully executed to identify cost savings and reductions in public consumption,” it said.

“Cost-of-living support should be targeted and temporary, better focused on supporting vulnerable households and viable businesses, including by using means testing.”

On Monday, Robertson put forward a package of cuts and reprioritisations to the Government’s accounts, which would see the deficit reduced by annual cuts starting at $524 million this year, rising to $1.4 billion by 2026 – 27.

But that won’t be enough to enable him to meet his surplus target of 2025/26.

As far as National is concerned, the package announced yesterday was surgically aimed at what the political commentator Matthew Hooton has described as the “median voter”: an Auckland couple in their late 30s with two children and a household income of $148,000.

Under National’s proposal, they would get total income relief of $79 a fortnight.

But what National didn’t highlight was that they would now have to pay bus fares for their children to go to school.

They could come to $40 a fortnight.

So, the big question remains: What will the Government and National cut after the PREFU?