Big caveat on new National tax policy

National yesterday defined the difference between it and Labour with what it calls a  new policy direction which turned out to be an enhancement of the 2071 English/Joyce tax cuts policy.

Party leader Simon Bridges, under pressure from within the party and caucus over his leadership, yesterday made a state of the nation speech which made a pitch straight to the core National vote.

He announced that National would amend the Income Tax Act to make sure income taxes were adjusted every three years in line with the cost of living.

“Within a year after every election, Treasury will advise the Government on how much the tax thresholds should be adjusted to account for inflation,” he said.

“That means income tax thresholds will increase every three years to stay in line with the cost of living.

“The first change will be in 2021 and relate to the tax years of 2018, 2019 and 2020.”

But the policy comes with a big caveat — the cuts would not go ahead if the economy turned sour.

The immediate question, though, was if National cut tax revenue, what spending would it cut.

Finance Minister Grant Robertson said “Taking their estimate of $650 million a year for this policy, on top of that Amy Adams needs to find billions of dollars over the next five years to reach her debt targets, there is a massive hole in roading expenditure, and we’ve got Nikki Kaye saying she’s going to spend hundreds of millions more on teacher salaries.

“It just doesn’t add up, unless there are massive cuts to core areas like health, housing and education.”

And that will be a charge National will have to answer.

There was clearly an appetite at the last election for more Government expenditure on some key social areas.

The New Zealand Election Survey of voter opinions in 2017 found that 80% wanted to see more expenditure on health; 69% on education; 68% on housing and 58% on law and order.

But National’s Finance spokesperson, Amy Adams told POLITIK last night, more spending in those areas would still be possible even with the tax cuts.

“It’s not only possible to continue to increase funding in health and education and those core areas, It’s something that we acknowledge should be done and we don’t think it’s an either – or,” she said.

Adams said that the National government increased expenditure in those areas every year when it was in government, even during the GFC.

“But also  I think the thing for me is not how much money can the government spend on a headline vote but effectively what can they achieve.

“There’s no doubt Labour are very good at spending but actually we would argue, and we argued all through our last term, that what matters is the results you get for New Zealand in those areas.

“That may also involve more spending  but it’s not simply who can spend the most  it’s who can spend what they need to spend to get the ultimate  outcome for New Zealanders.”

Bridges argues that inflation is pushing even modest income earners into the top tax brackets.

He said that by 2022 workers on the average wage would be paying tax at the top rate.

But yesterday’s policy announcement is really a revamp of the party’s last election promise of tax cuts which were also prompted by the way inflation pushes people into higher tax brackets.

The cuts were introduced in the 2017 budget and the accounting firm EY, said in a commentary that  Finance Minister Steven Joyce had targeted the cuts for maximum impact at middle-income levels. 

“The case for targeting is strong,” it said.

“It is people on middle incomes who have seen the biggest proportionate increase in their tax burdens since the last tax cut in 2010.

“For the tax year ended 31 March 2017 the average full time worker paid almost $2,000 more in income tax than they did in 2012: $10,701 compared to $8,719.

“ That’s around $38 per week more. Even inflating the 2012 payment to today’s prices, that’s nearly $30 per week more.

“That is due to fiscal drag: the combined impact of wage growth and inflation dragging people into higher tax brackets.”

Yesterday’s policy appears to seek to target exactly the same demographic that Steven Joyce did in the 2017 Budget.

The problem for National is that  Treasury is already forecasting a lower tax take for the period 2020 – 2023.

Figures from the  Half-yearly Economic and Fiscal Update from last December show that between 2020 and 2023, tax revenue increases by only 2.5%; government spending is forecast to fall over the same period by  1.4%.

It is clearly a delicately balanced equation.

Adams concedes that if there were to be a substantial economic downturn and these figures were to deteriorate then National would have to look at its policy.

“It’s a reasonably modest adjustment to how our tax system works, and we have certainly made clear today that there will be a veto in place for the government of the day.

“If there was a really significant economic event like the GFC  then they would always have that ability to say time is not right.

“But our view is that as a matter of principle and at a system level there should be a system that works on the basis that, all things being equal tax thresholds should be adjusted to keep in line with inflation like almost all transfer payments in the government system. 

“However If  there was a significant event then, of course, the governments would need to be upfront about that.”

What National does not know is how Labour will respond to the report of the Tax Working Group.

The government has already set as a bottom line that any taxation moves as a consequence of the report will have to be fiscally neutral.

That raises the possibility that Labour would be able to offset new revenue from say a capital gains tax or new environmental taxes against existing income tax rates.

They too could go into the next election offering cuts.