By Bernard Hickey
An earthquake shook New Zealand's political and economic landscape last week.
Finally, there is now a clear set of battle lines between the two major political parties ahead of this year's election.
It will be fought over the issues of foreign debt and income inequality, both of which are the major issues facing most developed countries in the post-Global Financial Crisis era.
In his state of the nation address Labour leader Phil Goff detailed plans for a tax-free zone for the first NZ$5,000 of everyone's incomes, paid for by an unspecified crackdown on tax avoidance and a new and also unspecified high tax rate on taxpayers earning well in excess of NZ$100,000.
Goff has correctly understood the growing mood of revolt in New Zealand and elsewhere about the widening gulf between the uber-rich owning most the assets and the working (or unemployed) masses. Last year's tax cuts for the richest New Zealanders paid for by a consumption tax hike on everyone has given this mood new momentum here.
Prime Minister John Key hit back quickly with his own mood-catching device. New Zealanders are in an austere and nationalistic mood. We are striving to balance our own household books and know in our bones that New Zealand as a nation has been borrowing too much from overseas for too long. We have spent the proceeds of this foreign borrowing or invested it poorly.
Key argued the moment of truth was near where we had to decide what to sacrifice to start repaying this foreign debt and to avoid being forced into a humiliating Irish or Greek style slash and burn exercise. Key argued the first pieces of ballast to ditch were stakes of up to 50% in Meridian Energy, Mighty River Power, Genesis Energy and Solid Energy.
Now the battle of 2011 is on. Labour wants taxes on the rich and no asset sales. National wants to preserve tax cuts for the rich and to sell assets to repay debt.
It has surprised many how quickly the fault lines emerged, but they have been building for years, and not just in New Zealand.
Worsening inequality
Debate in policy-making circles in the stressed developed economies of the Northern Hemisphere is all about dealing with economic inequality, which many believe helped cause the financial crisis and is now worsening dramatically because of it.
In America, the top 1% own more wealth than the bottom 90%. The middle and underclasses borrowed heavily over the last decade to compensate for long term stagnation in real wages. Meanwhile the financiers of all this borrowing made out like bandits. Now after being bailed out by governments worldwide, the same CEOs, bankers and fund managers that lent like drunken sailors are paying themselves bonuses as if nothing has changed.
The unfettered American version of global capitalism has been exposed as an unsustainable fraud that drives ever bigger shares of wealth into the hands of a powerful elite. This was the main topic of debate this week at, of all places, the World Economic Forum at the luxury Swiss ski resort at Davos.
Unsustainable foreign debt
Meanwhile, fear is growing about the sustainability of the foreign borrowing that many developed economy governments such as America, Britain, Japan and New Zealand have embarked on to run big budget deficits. How long before global financial markets punish the borrowers again with higher interest rates?
New Zealand's political leaders bottled these twin fears about foreign debt and economic inequality in their respective platforms. But neither have yet to take the hard decisions to deal with both issues.
If Goff was serious about fixing inequality he would be proposing land taxes and higher taxes on family trusts to ensure loopholes aren't created. If Key was serious about reducing foreign debt he would be cutting social welfare, health and education spending, and imposing new taxes on wealth.
Both leaders missed opportunities last week to really deal with these two issues of our age.
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