Reality forces Labour to temper reforming zeal

As the reviews and working groups begin to report back to the Government, the degree of intervention on the 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 have been suggestions that the Tax Working Group has, for political reasons, stopped short of recommending a comprehensive capital gains tax.

Finance Minister Grant Robertson has insisted the report of the working group, due to be released in the coming days, is an interim one only 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 (CGT) presented a shadow in the tax system that 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 set up the 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. The report represents something of a clean bill of health for electricity generators, determining the industry is ‘‘not making excessive profits’’. If anything, it may signal a shift that would undermine the savings and specials extracted by consumers who change retailers often, 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 sector that 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 have done.

Although Labour moved on, dropping the policy and replacing it with the winter energy payment, 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 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 it has been given this week. A CGT generates revenue when asset prices are rising. Although no-one can predict with confidence the path for house prices or sharemarkets, 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.

If it isn’t for tilting the scales of the tax system towards income earners ... what exactly is Labour for?

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 homes, 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?