Thursday 31 August 2023

Tax has often been an issue in New Zealand elections, but seldom the dominating one. Political parties tend to keep their plans quiet at election time and only announce them once they are in office. Neither Labour’s introduction of GST and halving of the top tax rate in 1986 were contained in the party’s 1984 election policy, nor was National’s 2010 tax switch and GST increase foreshadowed in its 2008 manifesto.

Indeed, the last election campaign where tax was the dominant issue was probably in 1957. That year, with the introduction of PAYE income tax from April 1958, the National government promised taxpayers remission of one year’s tax and a personal rebate of 25% of income, as compensation for the change. That rebate would have amounted on average to about $5,570 in today’s dollars. Labour countered with a flat rebate of £100 (equivalent to just over $6,100 today) plus the one year’s remission of income tax. In its last pre-election advertisement, Labour simply asked voters “Do you want £100 or not?”. It narrowly won the election but when the “Black Budget” followed in 1958 and increased taxes, Labour was doomed. It lost office in 1960 and did not return to government for twelve years.

Tax looks set to have a central position in this year’s campaign. Labour’s pledge to remove GST from fresh fruit and vegetables (estimated to benefit households by up to $5 a week) and improved Working for Families tax credits, has been countered by National’s plan to boost the income of an average family by up to $250 a fortnight through a combination of direct tax rate adjustments and childcare and Working for Families tax credits.

Labour’s programme is estimated to cost around $2 billion over four years from 2024 – National’s package will cost $14.6 billion over the same period. Labour’s package will be substantially funded by removing tax deductibility for depreciation on commercial buildings (which it had only recently re-introduced). National’s will be funded by a combination of government spending reductions (“reprioritisations” in its language) and four new revenue measures, bringing in altogether around $3.1 billion a year in additional revenue.

Until now, Labour has been claiming National favoured “tax cuts for millionaires” but National’s tax package shows that is not the case. Both parties are aiming their policies at what National has been calling the “squeezed middle”. Given that National’s package looks considerably more generous than Labour’s, the focus will likely shift to National’s costings and how credible they are. Labour will recall with relish the $10 billion hole in National’s 2020 fiscal plan and will be looking to find likewise again. It will find it harder, though, to criticise National’s planned $1.5 billion annual spending cuts, given its own announcement earlier this week of $4 billion in spending cuts, on top of the $4 billion already announced in this year’s Budget.

The focus will therefore shift to National’s proposed new revenue measures. Like Labour, National is planning to remove tax deductibility for depreciation on commercial buildings. National’s plan to move to user-pays immigration levies will probably not arouse too much attention. However, its foreign buyer tax and online gambling services tax may prove more controversial, not so much for the policy intent, but more for their practicality. Both new taxes should be popular with “squeezed middle” voters, concerned about foreign buyers of real estate and the impact of online gambling services.

National is budgeting to get just on $750 million a year from its new 15% foreign buyer tax on homes worth over $2 million. It will be hoping that foreign investors, shut out of the market because of Labour’s ban on house sales to non-residents, will now be attracted back to New Zealand in sufficient numbers to realise its revenue goal. But reaching that revenue goal every year is likely to be a mighty challenge, and reliant on many factors beyond the government’s direct control. With the online gambling services tax National is taking a punt that offshore companies operating these services will not feel sufficiently adversely affected by the new tax to withdraw altogether from the New Zealand market.

Nevertheless, there is a certain cleverness about these two measures. Labour will try to criticise the foreign buyer tax as opening the New Zealand market once more to non-resident wealthy foreign buyers at the expense of New Zealanders, but the $2 million threshold before the tax applies is unlikely to have much effect on the “squeezed middle’s” end of the market. And for wider social policy reasons, Labour will be pressed to criticise the online gambling services tax. The test for National with both these new measures will therefore be whether their revenue estimates stack up. Having made the commitments, National’s ongoing credibility will suffer if it cannot pay for them beyond year one.

In 2014, Sir John Key destroyed Labour’s campaign with his “Where’s the money coming from, Phil?” question to Labour leader Phil Goff during a televised debate, which Goff could not answer. National hopes to have avoided that spectre by setting out its plans to fund its tax cuts programme. Its challenge now is to persuade voters that not only are they workable, but, more importantly, that they are affordable.

Unlike the crudity of the 1957 tax election campaign, which essentially came down to which party could bribe voters best, this year’s campaign looks like a more sophisticated game of chess. Each side is primarily trying to trap the other, rather than promote good policy. The merits of various proposals will therefore run secondary to the mechanisms by which they will be implemented. That will leave it up to voters to scythe their way through the rhetoric and the political mind games to decide whose policy suits them best and is the more credible.

The party that wins that argument will likely lead the next government.

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