OPINION
Bryce Edwards
I am Political Analyst in Residence at Victoria University of Wellington, where I run the Democracy Project, and am a full-time researcher in the School of Government
When she was campaigning to be Minister of Finance last year, Nicola Willis pledged that she would resign from the job if she failed to deliver tax cuts in her first Budget. Now, it’s that pledge, along with Prime Minister Christopher Luxon’s pride, that seem to be the only reasons that the National-led Government is continuing to promise tax cuts in the face of opposition from just about every economist and political commentator from across the political spectrum.
Outside of the Beehive, there’s an almost total consensus that it would be crazy to push through tax cuts at the moment.
An urgent campaign has been building to persuade the new Government to ditch this year’s tax cuts. This isn’t just being organised from the Opposition benches, the CTU, or the media. It’s also coming from within the Beehive itself, and within National and other parts of the political right.
The campaign against tax cuts from the political right
The first major salvo in the campaign to cancel the promised tax cuts for 2024 came from the Deputy Prime Minister. Winston Peters gave his remarkable State of the Nation speech last weekend, which included the unprecedented critique by a Deputy PM of his own Government’s upcoming Budget plans. Peters signalled that there was a fiscal hole of $5.6b in National’s figures for the Budget and that he couldn’t see how Willis was going to fix it or be able to deliver tax cuts without borrowing, introducing new taxes, or making unacceptable spending cuts.
Former National leaders, staffers and activists are also starting to send strong signals to Luxon and Willis that they need to quickly U-turn on tax cuts. The most interesting instance of this was Fran O’Sullivan’s column in the Weekend Herald on Saturday which reported on former National Prime Minister John Key meeting Luxon recently for breakfast and urging him to pull back – see: Tax cuts: Luxon needs to take long view, revisit plan (paywalled)
O’Sullivan, who is closely connected with the Auckland business community and people like Key, reports on the former PM’s message to Luxon: “Key strongly believes a new prime minister should think about delivering a political change programme by taking a three-term view, not a three-year view. They should assume – if successful – a prime minister or their party will have nine years to deliver a considered change programme rather than trying to cram all their spending cuts and policy changes into three years (and going too hard in the first year), risking plunging the country into so much discontent their programme has to be abandoned and they don’t get re-elected. It is vital to secure trust in that first year in office.”
Her own view also appears to be strongly against the tax cuts and big spending cuts, with O’Sullivan saying: “the Government’s books really do need to be knocked into shape before they dish out a programme of inflationary tax cuts” and “The rational choice would be to wait for revenues to restore and park the tax cuts until we can afford them.”
Commenting on O’Sullivan’s column today, financial journalist Bernard Hickey says: “It’s clear some of the grandees of the National Party are starting to get nervous about the ‘crash or crash through’ mentality that seems to have gripped PM Christopher Luxon’s coalition ahead of the Budget on May 30”. He points to the fact that Key and Bill English had also promised tax cuts when they won in 2008, but a few months into power they announced that these would be delayed and similarly that big cuts to expenditure wouldn’t occur.
Hickey says that Key and English “were wary ahead of their first Budget in 2009 of being painted as the ‘nasty’ party or trying to get too far ahead of the electorate. That’s why an initial plan for income tax cuts was suspended in early May 2009 for a Tax Working Group review” – see: Key fears Luxon is going too hard, too early (paywalled)
Many on the political right are bewildered by the Luxon-Willis determination to implement tax cuts in a time of austerity, recession, and budget deficits. One of these is political commentator and insider Matthew Hooton. As early as October last year, he was campaigning for the tax cuts to be ditched, pointing out they were only really driven by the National leader himself: “Luxon alone decided to proceed with National’s ludicrous tax ‘plan’, that was largely written by lobbyists, doesn’t add up and would cause higher inflation and higher interest rates than even Labour, despite the full benefits going to only 0.18% of households” – see: Who would lead Nats into 2nd election? (paywalled)
Hooton pointed out that it was a captain’s call by Luxon to promise tax cuts, “which was closely followed by Simon Bridges’ resignation from Parliament and as Finance Spokesperson.” In this Hooton was picking up on the insider accounts of Bridges quitting politics as a direct result of being forced by his leader to announce a tax cut policy that he didn’t believe had been properly considered by the caucus, or even by him as finance spokesperson. He clearly decided he was better not to continue working under Luxon, and he could do more from outside of Parliament.
In terms of Key’s decision in 2009 to ditch his promised tax cuts, Hooton argues that the decisions served him well: “It enhanced rather than damaged his and Bill English’s reputations for straight talking and economic management.” It meant that people knew they were more concerned with being “responsible governors” than “desperate campaigners”. But the jury is still out on which camp Luxon and Willis fall into.
Hooton argued on Friday in the Herald that Luxon refuses to face the fiscal realities, and points to the International Monetary Fund warning “that Luxon’s planned $18 billion tax cut programme (including landlord tax breaks), scheduled to hit the economy in less than 15 weeks, is targeted at those most likely to spend the lot, which means it would be maximally inflationary. That would delay cuts to interest rates or force the Reserve Bank to increase them again” – see: NZ First now a voice for economic orthodoxy (paywalled)
Instead of directing money into tax cuts which will only exacerbate the re-emergence of “stagflation”, Hooton says that any funds that Willis finds from spending cuts should simply be used to pay back debt, which “would see inflation and interest rates fall immediately.” Not to do this would be, according to Hooton, “economic lunacy that not even Muldoon, David Caygill or Grant Robertson would have considered ahead of their 1984, 1990 and 2023 nadirs.”
Hooton and the likes of John Key aren’t exactly out on a limb with their opposition to tax cuts at the moment – there are plenty of other mainstream economists and Establishment institutions that are also issuing advice against National’s fiscal plans. Hooton has put together his own list: “Treasury, IRD, DPMC, RBNZ, Infometrics, Sense Partners, the NZ Initiative, the Taxpayers Union, and the IMF”. None of these voices are necessarily against tax relief in general, but are united in giving advice against it happening in the current economy.
The growing consensus against tax cuts
Writing in the Listener today, Danyl McLauchlan argues that for the greater good, National needs to ditch tax cuts this year: “The best thing for the economy would be to cancel or defer the tax cuts: they’re obviously unaffordable, and if they’re part-funded by borrowing, there’s a risk they’ll be inflationary” – see: Pre-election claims are coming back to bite the embattled PM (paywalled)
McLauchlan outlines that National politicians like Nicola Willis only have themselves to blame for getting into their current quandary by making election promises that they can’t deliver: “Nearly every economic commentator in the country expressed scepticism about the affordability of National’s extravagant promises but Luxon and Willis refused to release their modelling, reassuring the nation that the numbers were ‘rock solid’. In the months since the government was formed, we’ve seen an elaborate pantomime routine from the Prime Minister and his Finance Minister, playing the role of sad-faced clowns turning out their pockets and rubbing tears from their eyes. There’s no money! The economy is deteriorating! There are fiscal holes in the government’s books! All of these problems National warned us about during the campaign have found them dumbstruck in its aftermath.”
Darkly, he suggests that Luxon and National are likely to go the same way that the UK Conservatives have in recent years – deeply unpopular and mismanaging the economy: “If he borrows to pay for them he’ll be compared to Liz Truss, the shortest-serving prime minister in British history, who generated a currency crisis with a reckless plan to fund tax cuts with large-scale borrowing, and would risk lowering the value of the dollar.”
Herald business editor Liam Dann also wrote in the weekend that the Government is looking “cruel and miserly” in its obsession with cutting spending to deliver some sort of tax relief, and he makes it clear that he thinks the “madness” of tax cuts needs to be halted – see: Tax cuts need to be put on hold until we can afford them (paywalled)