Luxon needs second look at tax cut plan
Prime Minister’s first job should be to get the books back in shape — then learn to bring the voters along
When Sir John Key and Christopher Luxon recently breakfasted, he would have urged his political protege to take caution preparing the May 30 Budget.
Key strongly believes a new prime minister should think about delivering a political change programme by taking a three-term view, not a three-year view.
They should assume — if successful — a prime minister or their party will have nine years to deliver a considered change programme rather than trying to cram all their spending cuts and policy changes into three years (and going too hard in the first year), risking plunging the country into so much discontent their programme has to be abandoned and they don’t get re-elected.
It is vital to secure trust in that first year in office.
Get Key on this topic and he’ll happily cite Tony Abbott, whose disastrous first Budget began his death spiral as Australia’s Prime Minister.
The problem was the cuts in Abbott’s Budget deeply offended the egalitarian streak that still ran deep in the Australian psyche. He also cut election promises — Luxon has not done that (yet) — and was dispatched as Prime Minister through a caucus spill after just two years at the top. What’s the point, you may ask? Just look closer to home.
The prior Labour Government notched a historic first in 2020. They were New Zealand’s first majority Government delivered under the MMP electoral system. But that Government tested the country’s patience by forcing too much change through an ineptly delivered programme. It had to toss out policies, then got tossed out itself at the October 14, 2023 election.
Cabinet ministers are spending a good deal of time down in Wellington negotiating with Finance Minister Nicola Willis on the amount of funding their portfolios will get in the May 30 Budget for the 2024/25 year.
The drum out of Wellington is there is “no magic money tree”.
Cabinet ministers have been told this ad nauseum in the lengthy meetings on Budget expenditure.
Ministerial speeches are now beginning to be peppered with that phrase as part of the Budget softening-up exercise, as well as new labels for the environment they inherited from the last Government such as “the obstructionist economy”, which in case you have not yet heard it, was run by a “vetocracy”. It’s all going to get awfully juvenile and misses the point that slogans are no substitute for the dawning reality the Government’s books really do need to be knocked into shape before they dish out a programme of inflationary tax cuts.
Slogans don’t disguise the fact there is a strong tussle emerging over whether what has been the prevailing view within Cabinet (that it is better to frontload as much as possible of the current round of Government expenditure cuts into the upcoming Budget) is in fact the best option in a recession.
National wants to deliver on the tax cuts pledge it took to the 2023 election, without having to borrow. And its partners in NZ First and Act also want to make good on their own big spending promises. There is obvious tension.
In reality, the tax cuts will provide a sugar hit as households spend more.
But not everyone benefits. The very real risk is that inflation simply stays high. The Reserve Bank keeps the pressure on and it will take a good deal more time to climb out of the current economic slump.
There are options.
The Key Government also came to power in difficult economic times. The Global Financial Crisis was still in swing. New Zealand corporates found it was difficult to access the international capital markets. There were earthquakes to deal with.
It has become commonplace for partisan commentators to deride Key as simply “smile and wave”. But by 2016, New Zealand was being lauded as a rock star economy posting an annual growth rate of 3.6 per cent — more than double the OECD rate of 1.6 per cent.
The policy Key and his finance minister Bill English pursued was known as “incremental radicalism”. The Key Government’s secret sauce lay in four sequential steps: explain the reason for changes far in advance, bring the public with you, adjust the expectations of the electorate and implement reform with competence.
The problem Luxon and Willis face is they are not getting cut-through. They are being drowned out by the verbal incontinence of Winston Peters and David Seymour.
The IMF has made it clear New Zealand is in a hole.
The rational choice would be to wait for revenues to restore and park the tax cuts until we can afford them. Luxon won’t want to do that. The next best option is to phase them in over a longer period and sell some more assets to pay down debt.