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: