How Peters could derail tax cuts and deliver the economy
Clinging to a campaign promise, in the face of strong economic advice not to do so, has doomed other governments to one-term oblivion, but that seems National’s intent in continuing to implement its tax cut policy.
Forget the political commentariat’s braying. When institutions such as Treasury, IRD, the Reserve Bank and the International Monetary Fund decree that the tax cuts will only drive inflation and delay bringing down the official cash rate, a government ignores that advice at its peril. Now that peril has seeped into the coalition’s leadership, as an irresistible force paradox, created by Christopher Luxon’s unstoppable force meeting Winston Peters’ immovable object.
Tensions between the two were made public a fortnight ago when Peters shrugged off the deputy prime minister korowai and, as NZ First leader in his state of the nation speech, attacked his own Government’s Budget, claiming there was a $5.6 billion fiscal hole, and expressing strong doubts that Finance Minister Nicola Willis would be able to implement the cuts.
Publicly undermining a senior colleague may be a breach of Peters’ coalition agreement, but it also underscores the ongoing haggling among the coalition parties in getting their coalition promises across the line ahead of the May 30 Budget.
For NZ First, that means an increased $1.3 billion in funding for Pharmac and the $1.2 billion Regional Growth Fund.
Wednesday’s Budget Policy Statement (BPS) made it no clearer if either policy had made it into Budget 2024, but Willis’s ironclad promise of tax cuts for all income levels was confirmed, at a cost of no guaranteed surplus for the foreseeable future, with National’s promised 2026/2027 deemed unachievable and a surplus in 2027/28 “not a given”.
All of which has set the stage for political warfare between National and Winston Peters where the fallout will be carnage.
All Winston needs to do is not agree to vote for Budget 2024 and National’s tax cut plans will be scuppered.
He will paint himself as fiscally responsible while Luxon and Willis will be realistically described as negligently Muldoonist.
Peters will refute Willis’s claim that tax cuts “will be funded by reprioritisation, savings and new revenue measures”, instead portraying them as unnecessary borrowing, while introducing new taxes and making mean spending cuts to pay for them.
National’s priorities for Budget 2024 to “deliver meaningful tax reductions to provide cost of living relief” while “identifying enduring savings across government departments and agencies”, Peters will paint, again correctly, as this Government spending money it doesn’t have before spending cuts are even realised.
And in delivering tax cuts, which Willis conceded on Wednesday may be less than what National campaigned on, she won’t be forced to resign as she pledged, but she may be wishing that’s the case when the financial markets inevitably react and voters turn their backs in dismay.
Willis and Luxon need to read history’s lessons about what happens when responsible leadership is abandoned in favour of keeping poorly accounted-for campaign promises. Lessons such as those taught by Willis’s former boss, John Key, who in 2009 during the Global Financial Crisis abandoned his party’s tax cut plans, thus ensuring National enjoyed three terms in power, not three years.
Or the lessons of UK Prime Minister Liz Truss, who brought in extensive tax cuts, without spending cuts to match, which saw the Bank of England intervening to stabilise a plummeting pound, forcing Truss to resign after a mere 44 days in office.
With National eschewing any notion of being responsible fiscal managers, the stage is set for Winston to assume a role he held in the 2017-2020 Labour-led government, that of the sensible political handbrake that forces his coalition partners to see the error of their ways.
Also driving his motives this time round is the issue of legacy, both in the longterm and short, in being anointed once again as kingmaker.
Because while it has been a short and disruptive four months since the ink dried on the coalition agreement, in Winston’s world the political campaigning begins the minute you win government. That means letting the public know that he’s the real boss, while Luxon is merely the schoolboy.
Luxon and Willis’s refusal to change direction only emphasises that.
And there’s no-one more certain to take advantage of the political turmoil that’s about to erupt than Winston Peters. He will be able to harness the heartland’s anger as they face up to years of deficits, low-wage growth and an economy on life support.
Hapless governments who don’t recognise dire economic realities and who are determined not to be prudent are destined to become the kind of political pariahs that history deems Robert Muldoon is.
At the end of the day, as Key himself would say, the choice is clear: either introduce tax cuts which would fuel inflation and cause interest rates to stay higher for longer; or abandon them, establishing yourself as an economic leader. The former guarantees one-term oblivion, the latter political ascendency.