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Opposition parties launch attack on government's economic policies in wake of quake, argue more taxation needed

Opposition parties launch attack on government's economic policies in wake of quake, argue more taxation needed

The Opposition Labour and Green parties have today launched more attacks on the National-led government's economic policy and its plans for how to pay for the Christchurch rebuild.

The moves follow signals from Finance Minister Bill English yesterday that New Zealand's Public Service is facing some austere years, with departments other than Health, Education and Justice likely to face spending cuts in the May 19 Budget. See yesterday's article here.

Prime Minister John Key has said those three departments may only receive nominal spending increases, sharing NZ$600-NZ$800 million found from other areas. Asked on Monday whether they would receive real spending increases (to adjust for inflation), Key said government had looked to do that in the past and was trying to act along those lines for the coming budget. See Key's comments in the video below.

Record deficit, quake costs

Government has signalled its budget deficit could hit as high as NZ$16 billion this year (or 8-9% of GDP), the largest in its history, as it struggles to cope with a slower-than-expected economy in the second half of 2010, and costs associated with the rebuilding of Christchurch.

The government is ramping up its borrowing programme to pay for the February 22 Christchurch earthquake, which could cost it NZ$10 billion, including NZ$5 billion in lost revenue over the next four years. Earlier today, Treasury said the government's borrowing programme would be increased by NZ$1.5 billion to NZ$15 billion for the year to June 2011. Government's net debt is set to rise above its self-imposed 'comfort zone' of 30% of GDP over the next four years, up from an expected peak of 28.5% in December.

English has signalled the government would pay for the immediate costs of the Christchurch rebuild through the front-loading of its borrowing program, while looking to control spending in its upcoming 'zero budget' as it tries to get its books back to a "meaningful" surplus by 2015/16 and start repaying debt.

The government is also wary of the threat of a credit rating downgrade from international ratings agencies like Standard & Poor's, which is reviewing the ways it assesses sovereign and private sector credit risks. What's more, the International Monetary Fund has advised the government it should control spending enough to get back to surplus by 2014/15, even though the earthquake had added significant costs to its balance sheet.

Opposition

Labour Finance Spokesman David Cunliffe, and Greens co-leader Russel Norman today said the government needed to look at other options to cover the costs of the quake.

Labour and the Greens would be likely coalition partners if the current opposition was able to get near forming a government after the November 26 election, although it is likely they would also need the support of either the Maori Party or a reinvigorated New Zealand First if Winston Peters made it back into Parliament (or both, along with United Future's Peter Dunne).

Labour tries to put Hughes saga behind it

The Labour Party has tried to come out firing after seemingly putting the Darren Hughes scandal, and subsequent rumours of a leadership challenge, behind them.

Finance spokesman Cunliffe said the upcoming 'zero budget' would be devastating for the New Zealand economy.

“A zero budget means cuts deep to the bone. The economic implications of such cuts would be huge, not only in terms of services lost to hard-working Kiwis, but in terms of the wider impact on the economy," Cunliffe said in a media release.

“Taking around a billion dollars of spending out when the economy is already in a hole will only mean digging the hole deeper,” he said.

“The cost of the quake should be spread over a period in keeping with the life of the assets that are being replaced."

Cunliffe told interest.co.nz last week that Labour would defer or cancel some expenditure plans and raise the top tax rate in order to pay for the quake costs. Examples were a cancellation of the Puhoi to Wellsford Highway project, and the government's plans to spend NZ$575 million on a missile system for the Navy's frigates. Labour might also phase in its NZ$5,000 tax-free threshold in its second term if it were to with this year's election, and it would raise the top personal tax rate for salaries "well into six figures".

Goff chimes in after Hughes saga

Labour Leader Phil Goff followed Cunliffe with a media release attacking the government's budget plans as he tried to shrug off reports his leadership was under threat. It is thought the Hughes saga may have put a large dent in any chances Labour had of forming a government after the election - chances hinged on how it could attack the current government's handling of the economy.

“Working for Families is now under attack, despite repeated promises by John Key and Bill English that no cuts would be made to it," Goff said in response to comments from Prime Minister John Key that the government may be looking at cutting the top level of the Working for Families tax package.

“They are selling the line that it is ‘wealthy’ families who will face the cuts. But there is no real money to be saved by cutting payments to families with a joint household income of over NZ$100,000. They can only make significant savings if they cut into the incomes of families where each would on average be earning less than the average wage, currently around NZ$50,000," Goff said.

“That means hammering people on middle incomes with at least a couple of children to support and high mortgage or rental payments," he said.

“It’s not only directly another broken promise, but it’s also hurting those whose incomes have already been squeezed by rising prices. If cuts have to be made, why doesn’t John Key start with people on his level of income, who scored more than NZ$1,000 a week in tax cuts.

“And the cuts and broken promises don’t stop there. KiwiSaver and interest-free student loans are also under threat, even though National promised before the election that they wouldn’t touch them. Of course, they also promised not to increase GST and ‘to cap not cut’ numbers in the public service," Goff said.

“While the Christchurch earthquake is being blamed for this, the economy was already in trouble before February 22. There was no growth in the last half of 2010 and after nearly two years of a National Government that’s their responsibility," he said.

Greens keep pushing levy

The Greens have been promoting the idea of a temporary earthquake levy to pay for quake costs, along with the suspension of pending company tax cuts, in a move it says could raise NZ$1 billion a year. Norman's argument has been countered by the government, with English and Prime Minister John Key saying a levy would dent consumer spending, and therefore the economic recovery and the government's tax take.

Norman has replied by suggesting NZIER research showed higher-income Kiwis were saving gains made from the October income tax cuts, rather than spending the money, meaning spending patterns would not be altered by a levy. Norman has also argued increased borrowing is putting the country at risk of a credit rating downgrade, citing advice received from Treasury a downgrade could add 30 to 100 basis points to mortgage rates.

“The government’s approach to borrow heavily to pay for the Christchurch rebuild carries a great risk of a credit rating downgrade, which would add significant deadweight costs right across the economy," Norman said in a media release.

“The other part of the government’s approach is to cut public sector spending at a time of weak economic activity, which carries the risk of sending the economy back into recession," he said.

“A temporary levy avoids both these risks as it spreads the cost of funding the rebuild of Christchurch fairly throughout the economy.

"Yesterday, Finance Minister Bill English signalled significant permanent cuts to public services and jobs in his speech to the Institute of Public Administration New Zealand. Cuts to government spending are partly driven by the Key’s Government’s reluctance to consider any new streams of revenue to pay for the Christchurch earthquake,” Norman said.

The Greens' proposal would see a levy of 1.5% applied to an individual’s income between NZ$48,001-NZ$70000, and 3% on income above NZ$70,000, while leaving the corporate tax rate unchanged at 30%. Norman said the initiative would raise NZ$1.026 billion per annum.

"People earning NZ$50,000 a year would pay an additional 58 cents per week. People earning NZ$70,000 per year would pay an additional NZ$6.33 per week. People on NZ$100,000 would pay an additional NZ$23.59 per week," Norman said.

The corporate tax rate is set to fall to 28% on April 1, costing the government NZ$1.1 billion over the next four years. Government is also making other changes, such as changing depreciation rules around property, in order to pay for the reduction in the corporate rate. It is expecting its tax package (which included income tax cuts and an increase in GST in October) to be fiscally neutral in the 2013/14 year, meaning reduced revenues for another two years. See more in last week's article on the tax package.

Pressure on government deficit, rating - needs to show it can bite the bullet

Asked yesterday whether he was worried about a credit rating downgrade in the face of the record deficit, Finance Minister Bill English replied, "What happens to the credit rating is ultimately up to the credit rating agencies, and they are going through a process of adjusting their measurements of sovereign credit. It would be difficult to predict how exactly that will turn out."

The government needed to show it was able to reduce its record deficit "pretty quickly over the next two or three years".

"I think the Prime Minister has signalled quite clearly the government's determined to do that," English told media after a speech to the Institute of Public Administration New Zealand.

"In the first place [the moves to reduce that deficit are] to make sure we don't leave a large pile of debt for the next generation to pay off. Large government deficits, and the large stock in debt that goes with it, is not good for the New Zealand economy," he said.

"It happens that credit rating agencies have criteria that push you in the same direction anyway. So we don't do it because of the ratings agencies, we do what's best for the economy and we have no doubt at all that reducing a very large deficit is going to be the right thing for public services and for the economy."

Here is Prime Minister John Key on whether Health, Education and Justice would get real spending increases at the May 19 budget, or just nominal increases:

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34 Comments

The opposition have no cred either so who cares, hence we are in this mess. National being inept also have only added fuel to the flames of economic failure. It's like kermit calling his clone a "muppet"!

Labour...if this country ever votes these jerks back to the pig trough!...they know their economic policies are a bag of shite...the trouble is they also know there is a large % of the people who don't understand the difference between debt and no debt...people who want what others have....and if they can get it by voting in a pack of useless fools..they will.

Cullen's tax cuts were reckless, English's tax cuts were pure stupidity. Both cuts were bribes.

Now we're paying the price.

Which Cullen tax cuts? the ones to match National's?  if so the difference is?

Brash certianly tried to bribe his way to power in 2005 thank good he didnt make it....

Oh and dont forget the voters voted for it.....they can blame themselves.

regards

 

Cullens tax cuts were that dumb effort at social engineering  called "Working for Families"

Not even the the communist parties of Central and Eastern Europe went that far .

Labour went about Ramping up the tax rate on your labour to 39% and then giving it back to people who would never add much to the economy anyway

Its little wonder so many Kiwis  F%#d off to Australia while Labour was in power  

Or maybe they left because hosuign was too expensive and employers paid to little.....far more common....

Cullen's WFF was a response to Brash's tax bribe.....I agreed with neither, and certianly WFF needs to be cut back.....but to simply blame Labour isnt fair and balanced.

regards

@ Carpetbagger, the tax cuts were neutral...remember GST increased & property hit with depreciation...what's the problem with that?...Labour are a pack of idiots to think that the size of the State is OK, it's ridiculous...on TV the either night there was a Govt sponsored ad pointing out that it's dangerous to drive when putting your make-up on - and taxpayers foot the bill...thanks Labour.

Rubbish, the latest tax cuts will cost at least $1 billion over four years.  The figures in the budget supporitng documents showed $1 billion tax cost over four years, then applied some guess at how much the economy would benefit which reduced the cost over four years by about a half.  The economy has since been performing wore than Treatsury expected, so likel the cost is even greater.  

Add to that the costs of the previous tax cuts which are not claimed to be "broadly" fiscally neutral.  And we are still to pay for the $100 billion tax payer subsidy to corprates and farmer for the ETS.

All done by National who were elected knowing we were in a recession but apprently don't care.

 

 

Mr Cunliffe 'Labour might also phase in its NZ$5,000 tax-free threshold'
Mr Goff 'Working for Families is now under attack'

Help me out. I always imagined that a 'tax-free threshold' would be used as a means to phase out WFF.  
In fact I thought this may be the National/Dunne preferred route. Not quite 'Big kahuna', but definitely social policy done via the tax system.
Why is this approach wrong? Why can't they all get together and plan?

So what can we expect in the coming decade?

A certain global depression....

This, if the 1930s is any model brings, Low long term interest rates....kind of chews Hayek apart  (clearly he was wrong then and looks wrong today) High un-employment and the spectre of, without a major war no escape......Oh and the major war were Govn's spent like crazy on arms clearly brought us out of that depression.....

http://krugman.blogs.nytimes.com/2011/03/29/friedrich-hayek-zombie/

Is Cunliff as stoopid as he looks?

“Taking around a billion dollars of spending out when the economy is already in a hole will only mean digging the hole deeper,” he said.

Actually the money is still there pal, cause all those hard working folks get to keep a little bit more of their pay packet & can spend it as they see fit, not have it go towards more social engineering programs.

Beware of the Greens (alias the true 'reds') tail wagging the Labour dog.

Yes Cunliffe is stupid..absolutely bonkers...our deficit is coming up to 8% of GDP and he's having a moan about spending cuts...if now isn't the right time to cut Govt spending, when is??? If Labour were in power they would run the country into the ground, and still think they've done right by their twisted ideology...crazy.

Come on, even Bill Englih admits the books were pretty healthy when he got hold of them -- Cullen paying down debt at the right time -- when economy was on the up.  

Cutting public spending when the economy is on its side and flapping is the classic receipe for a double (or treble) dip depression.  Maybe a bit of reading on Keynes or Irving Fisher on debt deflation would help.

Isn't reading Keynes and the fear of Fishers's Paradigm what got us into this state in the first place, the real problem?

nah, i reckon it is more to do with the drivel called neo-classical economic theory.

Sorry! Misunderstood.....and I agree.

Yeah sure Cullen did a good job of paying debt...he was able to do that by taxing the pants off NZers...don't get me wrong, Labour did some good things....but they lost the plot with WFF, interest free student loans, buying Kiwirail, creating an army of beneficiaries, not addressing red tape (because for Labour process is more important than outcome), assisting the housing bubble, creating a bloated public service...blah blah the list goes on...

Taxing the pants off us?  When we had the second lowest personal tax in the developed OECD, now it is probably the lowest.  Funny enough countries with a higher tax rate seem to be doing better. I can't understand why?

I should say also I reckon there is lots Labour did wrong and still do wrong, but Key/English is doing worse.

Both of Hong Kong and Singapore have corporate and personal tax rates  substantially lower than NZ's , and having visited all three countrys recently , I'd pick NZ to be the laggard in financial growth and in personal happiness ...... by a country mile !

....... All the high tax regimes in Europe have suffered decades of high unemployment , riots by sorely pissed off youths , and piss weak GDP growth .

Can't explain that to Labour nor to the Greens , they are blinkered by their own " we know best " agenda .

It's like trying to get through to the 'flat earthers' the reason why the horizon is curved...they refuse to see it....waste of time Gummy....

Yes there is no doubt....N.Z. has a Tax it if it moves fixation....levee it before it flows.....and dam it too hell.....!!!

Small Country directed by small minded bureaucrats  forever playing catch up while planning disincentives(accidentally or otherwise) to investment growth.....

 

Still you gotta laugh aint you.......that's always the best thing to do when your sad.

"Both of Hong Kong and Singapore have corporate and personal tax rates  substantially lower than NZ's , and having visited all three countrys recently..."

Only if you don't factor compulory contributions into the Central Provident Fund, which would otherwise give Singapore an effective taxrate of 55% of the annual wage.

".... All the high tax regimes in Europe have suffered decades of high unemployment , riots by sorely pissed off youths , and piss weak GDP growth."

Europe has suffered decades of high unemployment, because of Europe's government's policy of encouraging migrants from their former colonial territories in order to dampen the bargaining power of labour in the 1970s as a preface to the offshoring of European and American productive capacity that took place in the 1980s.

The only developed nation with the exception of those such as the Nordic country's who have the luxurary of possessing significant hydrocarbon reserves, whose  whose economy has been immune from the economic crisis has been Germany. They've done so through redeveloping their industrial sector in partnership with their government, particularly as part of the stimulus package that they mandated in response to the economic crisis in 2008. 

http://www.economywatch.com/economic-stimulus-package/germany.html

"German government has allocated €100 billion towards loan for sick and recovering industries.

German government has allocated €100 billion towards loan for sick and recovering industries. This credit and guarantee fund would inspire upgrading of old manufacturing processes with updated technologies."

 

 

Here's the thing. Everyone seems worried about the Government not having enough revenue.

But let us look at the real issue. Our biggest companies are paying little or no tax. The existing tax system is flawed. 

Fonterra paying an effective tax rate of 2.3%. Our main trading banks setting the example with their structured finance ventures.

So what is the answer.  A simpler tax structure. Not higher taxes.  Just collecting what is due already.

 

 

John Keys is a very dangerous individual. Definitely not to be trusted.

1. He knows that NZ does not need a bailout yet he is starting to threaten one if we do not quickly sell off our power companies

2. He is allowing prisons to be run a by a gang of crocks called SERCO- look them up.

3. He is allowing debt to ramp up on his watch to unseen levels while blaming labour again and again.

 

What scares me most is that over the last financial quarter we only achieved a growth rate of 0.02%, despite the Government pumping in $300 million per week into the economy.

What happens when that level of cash injection is reduced or stopped completely?

 

 

Well Tony I could guess at response from English and Key at something along these lines:

1. 'We have cut the company tax rate so companies have more money to invest in capital and pay higher wages'

[perhaps, but they also have much debt to pay back still, and you've been telling them to do that. They also can't claim depreciation on their buildings any more, which for some means they will be paying higher taxes than before April 1]

2. 'We have made substatial changes to the RMA and cut red tape'

[er, so this means more spending how? Yes we can build houses faster (any evidence yet though?), but will this really make that much of an impact on wages, spending and investment?]

3. 'High commodity prices will flow through to the economy and make everything better'

[Again, once debt is paid down. And no-one knows how long this will take. You've already admitted it's taking longer than you thought (hoped). PLUS although our export commodity prices have been rising, Volumes have been FLAT, which means even though we've been getting higher prices, somehow this hasn't encouraged us to look at increasing output or finding more efficient ways to export more. Big problem waiting here if prices fall.]

I imagine there are some more.

Govt will be borrowing heavily for another couple of years, by which time it is hoping consumers and the private sector are in a good enough position to start spending again. However not as much as under Labour, they say, because that's what got us into this mess.

They will just find a happy medium on their own apparently (This could happen - I'm not ruling it out as perhaps we've become smarter in our spending ways...).

Oh yeah, and,

4. 'Tax changes will mean less investment in housing and more investment in the tradable side of the economy (which we're relying on to expand and reduce unemployment because the non-tradable side has too much debt)'

[Well I'll believe that when I see it.]

Alex - what do you think would help with #4?

Well Les one argument could be if you really want to skew investment into one area of the economy, shouldn't you be giving incentives for investment there, rather than just a disincentive to invest in another sector competing for that capital?

Has government introduced any incentive to invest in the tradable sector?

With shares, dividends from the property trusts are taxed at the same rate as dividends in the 'tradable sector' companies like Rakon...

But then you're accused of meddling in the market, so that won't be changed (it would also be quite extreme to say tradable sector dividends should be taxed at lower rates than other dividends).

So how about saying, 'We want to expand this sector. We have confidence it can be done, so we're stumping up some of our own (taxpayer) cash to invest in the export side of the economy.

MED has been looking at ways to improve NZ's value-added food export industry, but what have we heard publicly on this...absolutely nothing. It's like it is being done in a back ally somewhere almost as if we shouldn't know about it.

I've chatted to MED about this, and have some doculments and am planning on doing a story on this (did you know we're the sixth or seventh biggest exporter of frozen chips in the world?).

Govt is saying it is strengthening NZ's capital markes. But will things change overnight? No, it'll take time for this to flow through. So is there an argument that govt should be looking to help out exporting companies, or people looking to expand/start-up these companies while capital is still hard to come by?

The argument is 'we gave them a tax cut', but they are all still paying down debt instead of capital investment. Why not say 'here's some support for capital/productive investment - that is what you must use it for.'

But of course you come stuck with where will govt get the money for this? Tax the non-tradable side more. John Key doesn't want to make changes that will make house/land values drop, but BE is asking why are house prices so high because this is a problem for our productivity and economy...

There is also an idea you maybe don't tax productive capital as much (ie if I invest in (buy) a better tractor to become more efficient). Gareth Morgan wanted to tax the hell out of all capital with his big Kahuna idea - but capital investment is exactly what this country needs.

That's a bit of a ramble, but if you want investment in one part of the economy, you should provide incentives for that, rather than just disincentives for investment in another part.

Cheers

Alex - I'd be keen to see at least a level playing field in regards to taxation, and m' usual stuff on monetary policy.

In regards to MED efforts, I think a centrally planned efforts can be appropriate in sectors where needs aggregate, eg. ag. No point each farmer doing their own R&D, better that an agency does that in a consolidated way. Where needs are dis-aggregatted, eg. hi-value add differentiated products/services, help with firm level tax incentives for 'winning behaviours' Eg. R&D. Howcome other countriesgetthis right and we can't?

As for your other questions, you as well as 'the powers that be', know the answers. It just requires a change of will.The question is, what is stopping that? Firms won't invest as well as they without while our monetary policy canes tradeables and non-tradeables goes scott-free. Accelerated plant, patent depreciation (a 'winning behaviour') would help, but ...

I liked the general intent of GM's idea and it could be modified to help rebalance, however, fat chance of even a meaningful discussion on that topic. Loved the idea of a GMI and disestablishing a heap of welfare departments.

Good ramble, liked it, keep up the good work, keep thinking, keep challenging.

Cheers, Les.

www.mea.org.nz

 

 

 

 

"So is there an argument that govt should be looking to help out exporting companies, or people looking to expand/start-up these companies while capital is still hard to come by?"

Alex, have you actually heard of the Export Credit Office?

 

 

ECO, a very useful institution.

http://www.nzeco.govt.nz/products

"It is important to note that the NZECO’s guarantee is only part of the financing package. The primary objective of the NZECO is to guarantee the risk of non-payment of a credit, loan or bond.

The NZECO does not provide the actual loan nor does it directly finance the credit. Accordingly, the exporter must engage with their bank or financier to help prepare the best solution to enable finance terms to be offered to their buyer."

How could their product range be improved to meet the implied expectations in Alex's comment? How else could the expectation (need) be met?

Cheers, Les.

www.mea.org.nz

sorry, double post

New Zealand has an economic performance problem.

So what say the watermelon lettuce heads and the dancing prancing flunkies of the Left to solve the problem?

Let’s tax our way to increased jobs, wealth and prosperity!

Oy vey.

Days to the General Election: 20
See Party Policies here. Party Lists here.