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One side says we should cut taxes but does not mention the implications for public spending; the other says we should increase public spending, but does not mention the implication for taxes, economist Brian Easton says

Public Policy / opinion
One side says we should cut taxes but does not mention the implications for public spending; the other says we should increase public spending, but does not mention the implication for taxes, economist Brian Easton says

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.


I have not really made up my mind about Christopher Luxon.

Over a decade ago, I would have said that business was a poor preparation for becoming a prime minister. (Farmers aside, the last business PM had been Sid Holland.) Politics was a profession and required an apprenticeship. My confidence in these propositions has been shaken by John Key. Admittedly he was an MP six years before he became PM and while in opposition he watched and learned from the Clark-Cullen partnership. Luxon, who has had more practical business experience than Key – running Air New Zealand is more relevant than finance – will have been an MP for only three years if he becomes PM in 2023 and he does not have the same exemplars on the other side of the House.

I was, however, disturbed when he claimed recently that New Zealand had never been so ‘politically divided’. He was born 19 years after the Waterfront Dispute and was only 11 during the 1981 Springbok Tour. But age is not an excuse. A successful politician needs a good memory (part of the function of the apprenticeship) supplemented by a good knowledge of history.

I make these introductory remarks because this column could easily be presented as an attack on Luxon. Rather, its focus is on the dishonesty of so much of the economic debate. Admittedly Luxon triggered the column, but he is not unique.

The trigger was his promise to repeal all the new taxes imposed by the current government. That is a political stance which I may respect even if I may not agree. My concern here is that there was little mention of how the tax cuts would be paid for.

No estimate was given of their size. Here is an attempt. The Treasury reports that tax revenue was 27.2% of GDP in the three years to June 2018 (National’s last budget year) and expects it to be 28.7% in three years to June 2024, when Luxon plans to take over. The 1.5 percentage points represent an additional revenue of $6.2 billion in the June 2024 year when Crown expenses are expected to be $124.8 billion, so Luxon is proposing a 5% reduction in government spending. Or is he? How is he proposing to fund the cuts? I am not holding my breath for an answer.

A number of analysts have pointed out that the tax cuts will massively favour the rich, which need not surprise us, given the way the tax system works. The spending cuts will additionally impose on the poor (recall the Ruthanasia-Jennicide package of 1991 to pay for the Rogernomics tax cuts for the rich). Such a distributional switch is a political stance that some will support. But will the poorer turkeys be voting for Christmas in 2023?

Luxon and his allies are not alone in failing to represent the full picture. Open your daily newspaper and count the stories demanding increased government spending. (Some of them make me weep.) Any given day they do not total $6.2 billion a year, say, but I should not be surprised if the total of the demands in a year comes near to that. (That does not allow for the looming fiscal pressures arising from population change which are hardly publicly discussed.) Again, there is no mention of the other side, that the government needs additional tax revenue to meet all these demands – a lot of revenue.

You can now see why the public discussion is dishonest. One side says ‘tax cuts’, without mentioning the public spending implications; the other side says ‘more spending’ without mentioning the public revenue implications.

Between the two is the struggling Treasury trying to reconcile the two demands without publicly talking about the issue. (If they solve the problem, they can put their mind to the less challenging one of how to square the circle.) Right now, twenty-odd cabinet ministers are making spending demands for their portfolio while simultaneously demanding that the others cut their spending, cut taxes and boost benefits to increase private disposable incomes. Slowly and painfully, they will come to a conclusion which will be announced in the May budget.

At which point the dishonesty will reopen. One group of commentators will say there should be bigger tax reductions, but they won't say what spending should have been cut to pay for them. The other side will bemoan there was not enough spending on the programs they advocate, but they will rarely mention the additional revenue requirements.

It is not a healthy way to run a democracy.


Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

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49 Comments

I say cutting out things like kiwibuild, commuter rail to Hamilton, cycleways over the harbour bridge, provincial growth funds, government PR spin doctors & water reform that the majority of the population are opposed to would be fairly uncontroversial.  
The major administrative burden reforming the healthcare system will involve should at the very least be pushed out till after it has had a break from the pandemic induced stress and over work.

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So you are keen on no actions to address climate change, continuing piss poor water quality, and continuing a seriously under-resourced health system.

All for greed.

Sad.

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I wouldn't mind paying for actions that actually worked.

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Andrew - couldn't find a reference to anything you mention so presume you created a straw man so you could destroy it! Cancelling  projects unlikely to be achieved and of dubious value to NZ just saves money being wasted leaving that available for more useful items. The public sector has failed virtually everything it is tasked with so time to consider the removal of a large portion by deregulation and measuring the effectiveness of the bureacracy by what it assists the private/productive sector to achieve with the promise of further removal as a reward for failure. We need a revenge & retribution commission in NZ.

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Just double checking that you believe giving the healthcare system a break after the gruelling time it has had due to Covid before foisting a new administrative framework (and associated stresses) on them is considered greedy in your book.

please produce citations with regard to water quality & climate change, my quick research suggests that we have some of the highest water quality in the world & that our cycleways are under-utilised (discounting EVs more heavily would likely be more effective - someone who has bought an EV is virtually guaranteed to reduce emissions whilst someone with a bike could give up cycling pretty soon after starting, resulting in the carbon cost associated with the manufacture and shipping of the bike but none of the benefits).

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The waterbed effect: no bureaucratic decision about transportation will do anything given we have an ETS. It can in fact only displace some more efficient change that would do more for the climate at less cost. That's what the ETS is designed to do: allow the distributed mechanism of the market to organically determine the most efficient way to cut emissions. (Avoiding it also requires and maintains an inflated bureaucracy of literally hundreds of government employees who could be either working elsewhere or working on something better.) I suggest reading Eric Crampton's blog on this topic.

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here have a a hanky to dry your eyes.

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Cancelling the 29B light rail will pay for a fair chunk of stuff.

That alone pays for 5 years of Luxon's tax cuts.

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It's unfortunate Luxon turned out to be a NIMBY. Interesting that Buffet is investing in rail - probably due to resource constraints playing a major role in the future.

National are unfortunately likely to embrace sprawl, resist intensification - in comparison - and underfund options for transport in favour of personal transport and roads more exclusively. Melbourne's City Architect points out that for every million of additional population they accommodate on existing arterial routes rather than sprawl at the fringe they'll save an estimated $110 billion.

National won't save us money by spending on $300k+ per metre roads at the fringes.

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Slightly more controversial would be the notion that we should cap the time on the dole at 2 years in every 3 ( requiring that people work 1 year out of 3 seems only fair to me, even if they are looking for work at their skill level taking a lower paid job for a year out of every 3 must be better for keeping their skills up then being on the dole in perpetuity).

perhaps arranging for the government to pay for a meal kit service, rent and utilities instead of handing out money would save some funds. Missing out on having spending money for the short time whilst in between jobs should not be too devastating on anyone.

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I think at the very least some community work for those on the dole.  There's a couple of alleyways near my place that could do with a waterblast, a coat of paint, some nails into the corrugated steel fences.  Could reach out to the various community groups and charities, see if they need some extra hands.  Could even charter a bus to round them all up and drop them off home.  

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You and your neighbours could of course complete this valuable community service.  It might even enhance the neighbourhood, contributing to your property values.  Nobody could accuse you of unearned gains or receiving free money.

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They could but that would beat the point of creating meaningful work for beneficiaries to do 1 year in every 3 (This means they could be on the dole for 2 years, participate in a work creation program for 1 year then be on the dole again for 2 years - in 5 years they would only have worked 1). 

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It is so frustrating to see comments like this - constant beneficiary bashing.

The way economics works is that there is an interest rate set by the Reserve Bank.  Attached to this is an inherent unemployment rate - i.e. the unemployed are unemployed through no fault of their own.

The only way to have full employment is to have a slave economy with no minimum wage.

The rest of us, who have jobs, should be grateful that we arent the unemployed ones, and we actually owe them a decent standard of living.

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There is already full employment, try to find staff. The other 3-4% don't want to work, and you and I have to fund them.

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Then you need to raise the $/hr being offered.

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That does not work because doing some would raise the median wage which would in turn raise the dole which is pegged to wage inflation, this would make the premium over the dole for working essentially the same again. Unless you have very high inflation, in which case the dole taking a year to get indexed may create windows during which work became viable.

after the first 7 hours of work a week on the dole the effective marginal tax rate ranges between 81.4% (50% abatement + 30% tax + 1.4% acc) and 118.4% (50% abatement + 30% tax + 1.4% acc + 12% student loan + 25% working for families) before factoring in income related rent, losing out on years 2 onwards of the best start payment & the winter energy payment.

for those who think in dollars not percentages working an extra hour gets you between $0 to $4.15, if you have to take the bus both ways to work that eats up 2 hours of pay, lunch likely takes another hour worth meaning you take home between $0 and $21 per day net for your work.

If your boss paid you $30 an hour your take home pay would rise to between $0 to $5.88 per hour or $0 to $30 per day (after transport and $5 lunch). The dole is set too high for some people to want to work for that tiny amount extra even if the employer paid $30 an hour.

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The huge increase in those on Jobseeker benefit at a time when employers are finding it difficult to recruit tells a tale and the dead hand of Govt/Bureacracy & regulation has convinced me to minimise my effort to that which will maintain my lifestyle and leave me less stressed and more time to enjoy life, the message is Big Govt make it too difficult and you will succeed in ensuring I have time to assist in removing 18 Labour and all Greens come the next election.

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In the last month or so 16,000  visas will or have been granted to overseas seasonal workers which I understand are fruit pickers. I'm reasonably confident that nearly all these positions could be fulfilled locally by the unemployed. There is something wrong with system and it could be too high a beneficiary allowance or the beneficiary gets excessively penalised for earning this extra income.

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Agree. There are able bodied people out there that choose to not work. Something is wrong. Just ask business owner desperately trying to get staff ATM.

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Then you need to raise the $/hr being offered.

 

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Yep, and put prices up to cover it, already being done. Hello inflation.

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Suggest you stay overseas  - N Korea nice at this time of year perhaps you should try living there.

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That does not work because doing some would raise the median wage which would in turn raise the dole which is pegged to wage inflation, this would make the premium over the dole for working essentially the same again. Unless you have very high inflation, in which case the dole taking a year to get indexed may create windows during which work became viable.

after the first 7 hours of work a week on the dole the effective marginal tax rate ranges between 81.4% (50% abatement + 30% tax + 1.4% acc) and 118.4% (50% abatement + 30% tax + 1.4% acc + 12% student loan + 25% working for families) before factoring in income related rent, losing out on years 2 onwards of the best start payment & the winter energy payment.

for those who think in dollars not percentages working an extra hour gets you between $0 to $4.15, if you have to take the bus both ways to work that eats up 2 hours of pay, lunch likely takes another hour worth meaning you take home between $0 and $21 per day net for your work.

If your boss paid you $30 an hour your take home pay would rise to between $0 to $5.88 per hour or $0 to $30 per day (after transport and $5 lunch). The dole is set too high for some people to want to work for that tiny amount extra even if the employer paid $30 an hour.

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That only works if the value created by that employee exceeds the $/hr. This is why minimum wages cause unemployment: by definition they outlaw the employment of low-productivity people in low-value jobs. Rising minmimum wages are the reason we have so few people employed in supermarkets compared to the past; and the reallocation of staff within supermarkets to higher-productivity roles (e.g. one person supervising eight self-checkouts; and staff working on click-and-collect). This isn't necessarily a win for those at the bottom end of the labour market. So, rising wages doesn't mean getting people getting off the job seeker benefit, it means employers rationalising their operations to remove low-productivity positions since they're no longer able to have them.

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Controversial spending cuts would include bringing back capital punishment (lowering the cost of prison) for repeat violent offenders or those who actively chose to ruin lives by dealing drugs such as Meth.

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Or Alcohol.

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Could add in those who deal in processed sugary foods, military arms and weapons suppliers, and a biggie - the dealers in cheap credit. Do you include pharmaceuticals in your definition of drug dealing?  What about those who ruin environmental lives or are we only considering human lives?  Each and everyone of us would be up for a beat down.  Does violent offending only include physical abuse or would you include other covert types of violence?

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Sugar is essential for body function ( given that it is required in different amounts in different people you need to rely on individuals to self regulate intake, some one selling sugar can’t know if you plan to consume it over a year or share it amongst your family ). 
Cheap credit supports employment (hence the government adding employment to the RBNZ mandate). Military deterrents prevent wars. 
Meth is not required by anyone nor does it help in any way.

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sadr001,

I think we should add to your far too short list; those who allow their dogs to crap on the beach and don't pick it up-or indeed anywhere else, those who assault nurses and other healthcare workers, landlords who do not maintain their properties adequately-decent heating, insulation etc and that includes state houses, people who throw litter out of their cars, boy racers and many others.

This would create many jobs; all those needed to police these activities, hangmen, grave diggers and others. For lesser offences I suggest transportation-to Australia of course. And bring back the stocks.

 

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Like I said controversial. Most of the items you have listed off appear to be completely legal at present, this means that attaching a penalty to them would come with an administrative cost and as such cost more money as opposed to creating savings for the taxpayer (the target of the original post). 
Different people would have different ideas as to which activities that currently merit jail time could be promoted to capital offences. Apart from meth dealing, I suspect mass murderers & serial child  rapists would be good candidates for capital punishment. (Potentially run a poll about each of those crime categories after a particularly moving incident hits the headlines). Once again “controversial”

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sadr001,

Oh dear, my attempt at irony has obviously fallen flat.

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The public is not stupid; we know that what we want (a cleaner NZ, generous and universal child benefit, more spending on health and defence) is expensive and would expect to see either substantial cuts in spending (tertiary education, Superannuation, accommodation allowance) or increased taxation.

Economists should focus attention on the efficiency of taxes/benefits. The Northern Motorway toll reputedly used half of income on administration costs.  There are numerous letters in the newspaper requesting GST exclusion from food and clothes; sensible unless you have ever been involved in the details: joy for computer programmers, accountants, lawyers and dishonest shopkeepers.

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"Efficiency or taxes and benefits"....you hit the nail on the head here, Singautim. Brian is an economist of course who sees nothing wrong with suggesting more tax equals bigger spend on infrastructure. 

Anybody with the slightest encounter with even, local government "fees" versus "services" knows that higher taxes or fees do not translate into any measurable provision of useful services. I enjoy the well known cartoon showing a labourer (Jose) up to his head in a hole he is digging.  At the rim of the hole are standing several "shiney suits" labelled "Director of Diversity",..."Health & Safety Manager",...."Chief Financial Officer",...etc, etc..

Underneath is the explanation....."times are tough, we may have to lay off Jose!"

In other words, if a government department gets more money, don't expect better service outputs, one can almost guarantee they will move to flasher offices/send the executive team to a hotel in Queenstown for "team building", and so on. Not my cynicism, just a matter of record.

Brian misses the essential point.

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New Zealand is a sovereign currency issuing nation. The finances is not the issue, the issue is what we use our real resources on.

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Yes it will be a lolly scramble --  but then whose fault it that.    When i look at the spectrum of Media,  the information offered is usually just click bait headlines, with very little investigative research and woefully lacking in detail and information for the public to make its own mind up. 

Honesty has long since gone -- when our media are no longer independent - ( Would the herald survive without Real Estate advertising money ?)  what about the very large government bribe to the media sector last year ....

We expect political parties to present information in a way that best suits and represents them -- we expect businesses to do the same --  but its Journalists and Media that are supposed to be presenting the truth, and balanced well researched articles that hold all parties to some degree of accountability and truth. 

 

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The media reflects the audience. People take the bait of click bait headlines, otherwise they wouldn't write them. Having them online gives them very good analytics to bear this out.

It's like blaming tabloid reporting - they wouldn't exist if no one bought and read tabloids.

edit: I'll give you an example: https://www.1news.co.nz/ used to have a "popular" stories section, that was automatically driven off analytics. It had to be post-processed to filter out the "entertainment" stories, because otherwise that's all it would have contained.

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i know you are 100% right --  but that just makes me feel even sadder!   

 i personally avoid clicking anything to do with the UK royal family for example -- or almost anything from CNN or NBC to avoid that analytics smashing my feeds for weeks on end with drivel But then -i haven't eaten Mcdonalds in almost 20 years and they are still here ! 

However it is scary that at times its impossible to even research something yourself -- as findign any sort of factual based article is a needle in haystack scenario!

 

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I hear you about the royals - the number of articles about the British version of the Kardashians is incredible.  I just don't understand why anyone cares about what they do.

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I have never come across an intellectually honest party yet.

Imagine the pitch; well voters, here's the deal. Elect us and we will do our best. We are very thin on talent, we have no intention of being open or transparent but that's standard, our big ideas are all based on our strongly based and biased political views and while we will of course pretend to listen, we will push ahead with them-until the polls show that we might well lose the next election. 

The manifesto means very little, so pay no attention to it-Vote For Us.

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If they wrote that and ended with - we are human, we will make mistakes, we will apologise when we do!  That would be so radical I'd vote for them.

For example Kiwibuild - a classic promise and a failed delivery.  Still waiting for the apology.  Add in mental health issues for children and beneficiaries with children living in emergency housing - our govt should repeat why these issues matter, apologise for going backwards and tell us how they will try to fix them.

 

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That sounds like Labours core manifesto principle without the truth..

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Returning tax rates to previous levels does not necessarily reduce tax take. On the tax side, we have a growing economy, post covid recovery, rampant inflation, and consequent bracket creep. On the spend side we have gross inefficiency and ineffectiveness at every turn,  and record beneficiary numbers at a time of record low unemployment. All this from a government full if people who are deeply convinced talking is doing. Plenty of scope for improving services while containing tax. 

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A number of analysts have pointed out that the tax cuts will massively favour the rich, which need not surprise us, given the way the tax system works. 

Those analysts will not mention the spending increases and policies of the last five years have massively favoured the rich.  Homelessness has soared, child poverty increases, wages diminish compared to rising inflation and real estate prices have doubled.  

It is a choice of tax cuts for the rich or spending increases for the rich.  Our poorer turkeys are forced to vote for Christmas.  

 

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There is a strong need to reduce income taxes as such reductions allow for the more productive use of labour.  NZ is too reliant on income tax.

However we need increased taxes to compensate:

a) rebalance business and income tax rates

b) add environmental taxes

c) add capital/capital gains/land tax in some form

 

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kiwi- When Dennis Labour Chancellor (the menace) Healy increased UK taxes to make the pips sqeak the tax take went down when the Tory Govt lowered taxes the take went up, NZ is no different reduce taxes, regulation and bureacracy and watch our economy blossom.

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The level of taxes should be aimed at maximising wellbeing per capita and its distribution across society.

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The elephant in the room is that cutting tax rates has on numerous occasions increased total tax take.. Examples of this have happened in both the UK and the USA.

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We certainly need to reduce income taxes and raise an LVT on the unimproved value of land instead. Reward productive work rather than folk sitting around on their ass-ets.

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