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Difficult tax choices ahead for National in talks with NZ First and Act

Craig Renney unravels the fiscal complexities facing the coalition as tax plans undergo reconsideration

2pm on Friday, November 3 will go down as one of the moments in New Zealand’s political history reminiscent of Sliding Doors. Up until that point, National and Act were on track to form a government with very similar ideological and fiscal aims. Upfront tax cuts would be financed by reduced investment in public services. There would be a greater role for the market in the public sphere and a more relaxed set of labour regulations. After 2pm, New Zealand First became a required partner. That makes life much harder for National and Act, as it brings a very different political perspective and a different set of financial requirements.

The centrepiece of National’s election campaign was $14.6 billion of income and landlord tax cuts. Some $3b of that was financed by a new tax on overseas property buyers. That’s now all but certainly gone, as it is unthinkable that NZ First would tolerate the sale of Kiwi houses to overseas buyers. Filling the gap left by the loss of that new tax would require a doubling of the indicated cuts to the public service – to 17 per cent.

That’s not feasible either, politically or practically. So, the promise to return a range of tax benefits for landlords will probably have to go. In a cost of living crisis, providing these made little economic sense to begin with. They put money in the pockets of those who have already done really well over the past two decades, yet the cuts deliver small (if any) value to the taxpayer or the economy.

Then there are other issues that need to be considered. National’s tax cut package also relies on the delivery of $2.1b of savings from ending building depreciation for commercial properties. Labour campaigned on this too. But NZ First has campaigned repeatedly on the need to provide additional depreciation support – particularly for small businesses. There’s a big cost to that. That $2.1b in savings starts to look like a tempting target for a policy that would be welcomed by the business community and would improve our chronic business investment problem.

The loss of both foreign buyers and commercial building depreciation would put a cumulative $5.1b hole in the tax plan. However, the coalition negotiations are likely to throw up other areas where the parties differ. Both National and Act have campaigned on removing what remains of regional growth funding within the Ministry of Business, Innovation and Employment. But that is likely to be an anathema to NZ First, who have championed the creation of a new Regional Productivity Growth Fund. If it were even half the size of the previous Provincial Growth Fund, that would require funding of $2b across the forecast period.

Funding this could come from the closure of the Climate Emergency Response Fund – which generates $2.3b according to National, and is to be used for tax cuts. Instead, it could be used to deliver energy security programmes across New Zealand. Fuel security is a key policy for NZ First, and it would also have the benefit of supporting job security and greater economic security in regions. But the gap in the plan is now $7.4b.

Taking that out of the tax plan would leave $7.2b remaining. That’s not enough to deliver even Simon Bridges’ policy of moving tax brackets to reflect inflation – it’s $1.8b short. And that’s before Treasury has adjusted the figures to account for faster-than-anticipated wage growth. This could be found from the remaining allowances, but in the first Budget, that would likely leave only $600 million for all new spending. Just keeping the lights on in education will consume all of that, something that National has promised repeatedly on the campaign trail. After that, there’s nothing left.

That also means the benefits of National’s tax cuts are now seriously diminished. A fulltime minimum wage worker would get $2.15 a week – not $12 a week. The support for families with early childhood education costs would be gone. The number of families getting $250 a fortnight in support from the Government wouldn’t be 3000. It would be zero.

All of this shows the challenges facing the three parties in pulling together a package that allows them to work together. What it also suggests is that rather than rushing headlong into tax and other changes at a December mini-Budget, some caution and restraint would be appropriate. The parties could spend a little more time working out what is actually needed, and how they will deliver that, without borrowing extra for tax cuts.

If you want an example of the headlong approach in action, look no further than the UK and the problems the Liz Truss government faced. It famously lasted less time than it took for an iceberg lettuce to wilt. Rushing to deliver tax cuts now for ideological purposes is likely to haunt all involved and will likely require painful changes in the future. The title track of the movie Sliding Doors is called Turn Back Time. The incoming Finance Minister might well be whistling that tune if they can’t get it right over the next few weeks.