Labour Leader Phil Goff delivered his pre-budget speech yesterday
, arguing against the government's planned tax switch to be announced next Thursday and suggesting the removal of fresh fruit and vegetables from the Goods and Services Tax (GST).
He also reiterated his suggestion of changes in the Reserve Bank's Policy Targets Agreement (PTA) and said Labour would roll back likely income tax cuts. However, he refused to rule out leaving in place any increase in the GST to 15% from 12.5%.
Goff started off saying the financial crisis was largely behind the world, New Zealand's fiscal position was much stronger than many other's, and the economy was likely to come out of recession faster. This meant the budget due on May 20 was a chance to make long term plans and support families (ie spend)
It’s also an opportunity to do something for hard working Kiwis whose wage increases last year were the lowest in a decade, and for families who are finding it tough to pay the bills at the end of the week.
The government needs to do more than simply sit on the sidelines and wait for international economic recovery to do its job for it.
Goff criticised the government's decision to suspend contributions to the Cullen fund.
The Super Fund has in fact returned strong growth. Since last year’s Budget it has added $3.5 billion in value. The Key Government’s failure to continue to invest in it has cost the government a million dollars a week in lost interest alone.
He then said the GST increase and likely changes to ACC charges and other fees would push up inflation.
It’s hard to see how higher prices will contribute to a New Zealand growth strategy. Bank economists warn inflation here could rise by four to five per cent by the end of the year.
For hardworking New Zealanders and Kiwi families, it’s a bad time to be pushing up the cost of living by increasing GST. Many retailers are indicating that the rise will be well over 2.5 per cent. They will use this as an opportunity to restore margins.
On top of the price increases, there are the increased costs of Government charges, like ACC. Petrol and power prices are set to rise still further.
Power companies admit that power will continue to rise at a much higher rate than overall inflation, and the Government continues to use power companies as a source of revenue.
Mortgage interest rates will rise repeatedly over the next year as the Reserve Bank puts up the official cash rate.
Goff said there were fairer ways for the government to pay back the extra GST revenue than giving tax cuts to those on the highest tax rates.
Instead of using the extra revenue from increasing GST to cut the top tax rate, we could give bigger tax cuts to middle and low income earners. That’s what I am committed to do.
The larger the tax cut National gives to the top, the smaller the amount left over for people on the average wage. Keeping the top tax rate at 38 cents doesn’t mean more tax - it means most people can pay less tax. We can make the top tax rate cut in at a much higher income than the $70,000 rate where it applies today.
He then went to suggest the exemption of fruit and vegetables, without nailing his colours to that mast.
A comprehensive, low rate GST is an efficient tax. I have always supported a low rate GST without exemptions.
With the proposed increase in GST, however, New Zealand will have one of the highest levels of consumption taxes as a proportion of GDP in the world. That undermines the justification for not having exemptions because low and middle income families are being hit harder and harder as the rate of GST goes up.
Other countries, like Australia and Britain, exempt basic food products. New research by the Wellington School of Medicine shows there are large positive effects from reducing the price of healthy food. People switch consumption from poor health products to healthier options.
With growing obesity among children and increasingly serious health problems in New Zealand, we should not ignore such research. Each year New Zealanders pay GST of about $175-200 million a year on fresh fruit and vegetables.
That’s about the same amount of money as the government is raising from the increase in tobacco tax. The tobacco tax may be justified on health grounds for discouraging smoking but it should not be simply a revenue raiser.
If that money were transferred to reducing the cost of basic food items such as vegetables and fruit, it would have a double advantage in health terms and meet equity concerns.
But there are real issues with taking GST off fruit and vegetables. We will need to be convinced that taking GST off these items would work by actually making food cheaper and easing the pressure on family budgets.
We would need to be sure it didn’t create more red tape than it is worth.
Goff then went on to suggest changes to the Policy Targets Agreement.
The key to boosting exports is a more supportive monetary policy. The independence of the Reserve Bank is crucial. But New Zealand is unusual internationally in having a single policy goal for the Reserve Bank of price stability.
The Reserve Bank of Australia, in contrast, is also required to support other objectives: a stable currency; full employment; and the economic prosperity and welfare of the people of Australia.
Labour will require our Reserve Bank here to pursue broader objectives, while retaining our full commitment to price stability, just as Australia is committed to both price stability and broader objectives.
But this alone is not enough to drive the change we need.
We need more than broader objectives; we also need a broader set of tools.
Recently the Reserve Bank has been making greater use of some of its prudential supervision tools to better support monetary policy.
Until now, the rules around banks’ capital requirements have been only weakly linked to risks around loans, and they’re not linked at all to wider economic risks.
An example of those wider risks are the asset bubbles that helped create the global financial crisis.
Monetary policy needs to play its role in not just maintaining price stability, but also in maintaining overall economic stability when there are other risks.
The Reserve Bank needs wider tools, so that we avoid the situation recently where monetary policy designed to dampen house prices simply forced up interest rates and the exchange rate for exporters.
This is a complicated area and Labour will release further information about what we are proposing later this year.
But I will say the Reserve Bank can be given more powers to promote stability in our economy.
I want to make it clear that while we want to support exporters, we won’t allow inflation to run rampant. We know families are struggling enough with prices outstripping wages.
And Labour will not allow some particular ideas that Treasury has floated in the past: Labour will not put a levy on homeowners who are already battling to pay their mortgage. We won’t give the Governor the power to vary GST.
Floating an idea that you don't really believe in is never a good idea. Goff has suggested this lame GST exemption idea, knowing it will be knocked back by any tax policy adviser worth his spreadsheet. It opens loopholes to drive trucks through and would destroy one the last great things left in New Zealand's tax system -- a clean, broad and simple GST.
Can you imagine what would suddenly be classified as fresh fruit and vegetables? What about fruit in yoghurt? Or freshly tinned peaches? Or vegetables in a bun, with a slice of meat and some fresh and fruity mayonnaise? How much would you count as fresh fruit and vegetables? The holes are endless. I can see a new profession: GST gaming expert.
I disagree with Goff's plan to reverse the income tax cuts and simply increase the thresholds. I think he is focusing too much of slicing up the pie than expanding the pie. His apparent opposition to any capital gains or land tax is particularly disappointing. It betrays his lack of understanding of the festering sore at the heart of the New Zealand economy and the government's finances: the huge hole in the tax base through which rental property investors have been diving headlong through for a decade.
Goff's thinking on monetary policy is similarly tentative and woolly. The Reserve Bank is already using its supplementary tool (the core funding ratio), which it created itself and has carefully implemented to avoid a big shock to the system. A vague collection of targets for monetary policy has been used successfully by some independent Reserve Banks. The Reserve Bank of Australia has done reasonably well, but the focus on inflation should never be relinquished.
Allowing politicians to dictate to central bankers that they should release the inflation lever to inflate away the debts they'd like to run up would be a big mistake in this day and age. Just ask the Americans and the Germans.
Goff's rhetoric is painfully conflicted. At one moment he is lamenting the government's various moves to increase taxes and inflation. In the next sentence he wants to relax the Reserve Bank's focus on controlling inflation and reverse income tax cuts. Goff appears lost in voteless wilderness, throwing out policies and words that he thinks might be popular, but not really knowing what to believe or having any overarching strategy or new thinking.
Your view? I welcome your comments and insights below?