National’s tax cut dilemma

Written By: - Date published: 10:45 am, March 28th, 2008 - 12 comments
Categories: election 2008, national, tax - Tags: , ,

If National are so keen to cut taxes and so critical of the Government for not doing so earlier, why are they being so tight-lipped about how they would cut taxes and even the size of their cuts? Because the Budget has them trapped.

Labour plans to announce its tax cuts in the Budget, probably including cuts coming into effect on October 1, before the election. This puts National in a difficult position. They will be going into the election with a tax cut programme already budgeted into future government forecasts and some of those cuts already flowing into voters’ wallets. Any National tax programme that does not incorporate these existing Labour tax cuts will mean taking money away from some voters, which is politically untenable for a pony whose one trick is tax cuts. National will most likely have to accept whatever tax cut programme Labour presents, and certainly will not be able to promise to reverse the tax cuts coming into effect on October 1.

National will only be able to offer additional tax cuts on top of Labour’s. But how much additional money will National have to play with? Colin Espiner estimates National might have a total of $3-$3.5 billion compared to Labour’s $2-$2.5 billion. Given it can’t reverse Labour’s tax cuts, that leaves National with only $0.5-$1.5 billion to play with. That comes out at only $3-$10 a week per taxpayer – not exactly an earth-shaking tax cut plan. Moreover, the additional cuts National proposes will stand in direct contrast to the extra spending Labour offers. Voters will already have decent tax cuts in the bag, National will have to convince them they should vote for a small additional cut (which, in National tradition, will mostly go to the wealthy), rather than new spending on services. That will be a hard sell.

The other option will be for National to blow the budget by offering several billion in tax cuts additional to Labour’s, but to fund that they would have to cut services or run a deficit. Any large cuts would be strongly inflationary. That would blow away National’s new moderate stance and scare away voters. National will go with the second option. National can’t be seen to be Labour lite on tax cuts; it must retain this point of difference by offering much bigger cuts funded by attacking spending. We can see signs of this in Key’s promise to cap the core public service and more vague mumblings about public sector waste, but as we’ve seen such measures will free up very little money.

So, on tax cuts, National is trapped between a rock and a hard place. It will have to follow Labour’s lead and will only be able to offer a pittance on top, or go for broke and promise huge cuts, no matter what the economic and social cost. Facing a fourth term in opposition, which option do you think they’ll take?

12 comments on “National’s tax cut dilemma”

  1. ghostwhowalks 1

    The US has found a way, they borrowed for tax cuts starting in 2002, but now they are just printing the money so that nanny state can bail out wall st.
    The pressure will come from big business here after the election to cut the state sector in spite of any promises/targets/goals to the contrary and they have the perfect person who can do double backfips

  2. the sprout 2

    “why are they being so tight-lipped about how they would cut taxes and even the size of their cuts?”

    perhaps because theirs will also be a “chewing gum” tax cut, and once that’s clear all National will have to offer voters is inexperience and equivocation?

  3. Sam Dixon 3

    If I’ve already got a tax cut from Labour, why am I going to vote for Johnny K if he’s only got $3 more a week on offer? Better to stick with experienced government than a slippery joker who always seems out of his depth

  4. BeShakey 4

    I agree with GWW, there are already signs that National will borrow to fund tax cuts. If you look at Englishs recent questions to Cullen, many have been suggesting that the government has been borrowing so why shouldn’t National borrow for tax cuts. The difference is that Labours borrowing has been for infrastructure, but nonetheless the direction seems clear.

    In the past there has been a tactic from the right to borrow for tax cuts, and then, when the deficit becomes a problem, cut services. This forces left opponents to either campaign on tax increases and smaller cuts, or to also cut taxes. Either way its a win win for the right.

  5. Stephen 5

    What about when Labour won in 1999? They promised higher taxes and better services didn’t they?

  6. burt 6

    Steve Pierson

    The only dilemma with tax cuts is for Labour. They have pissed around for so long now that Dr. Cullen is reduced to saying Labour tax cuts will be smaller than Nationals. That’s the scope of their policy release?

    Good god is Labour’s only answer to National’s policy to pip them at the post to implement it? Is this as good as it gets for Labour?

    After 9 years of saying ‘read my lips – tax cuts bad’, polls are looking shabby and now Labour plan to beat National by implementing the one thing they have denigrated National over for 9 years! OMG – You think this is good, have you no principals at all?

  7. Stephen 7

    He could mean a tax cut in terms of moving the tax brackets…but I doubt it.

  8. Draco TB 8

    After 9 years of saying ‘read my lips – tax cuts bad’, polls are looking shabby and now Labour plan to beat National by implementing the one thing they have denigrated National over for 9 years! OMG – You think this is good, have you no principals at all?

    Actually – I think Labour intends to beat National by proving that they’re better at managing the economy. Yes, I do think this is a good idea. Yes, I do have principals.

  9. higherstandard 9

    I doubt it Draco Labour aren’t stupid they will know that Tax cuts are critical to securing votes with the public and despite not wanting to enter a bidding war and lolly scramble with National that’s what this election will become.

  10. Ari 10

    Personally, I think Labour holding off on tax cuts was probably a good thing. It’s given us the resources to hold on during the coming global recession triggered by the US mortgage crisis, and has also made sure that tax cuts will be reasonably substantial while still maintaining spending and not borrowing. That’s practically a miracle. Another term with Cullen could only help the economy, I think.

    As for National’s strategy- they’ve already mentioned it. Borrow, borrow, borrow. I’m frankly amazed that they can talk of borrowing and of preventing inflation at the same time, but hey, you can’t expect the mainstream media to catch them that easily, I guess.

  11. darryl p 11

    Actually Ari, not all borrowing is bad. Almost all companies borrow money as bridging finance for growth. And if you can get 16% return on investment using money that you have borrowed at 9% then you are 7% better off. The real question we should be asking National is “What are you borrowing the money for, and what return to do you expect to see for that money borrowed”

    At the risk of sounding heartless, I’d suggest that borrowing overseas money to fix health is a bad idea as it’s unlikely to return on investment. But borrowing overseas money to grow tourism is a good idea as it’s likely to return more than what was initially borrowed.

  12. Phil 12

    Agreed Darryl. Here’s another way of looking at it…

    The interest rate on secondary market government bonds (a good proxy for the interest rate payable for ‘government debt’) is roughly 6.5%.
    Meanwhile, the effective mortgage rate for housing borrowing is 8.5%. This is pretty much the LOWEST interest rate Householders (that is, you and I) are going to be paying for taking on debt – credit cards, personal loans, OD’s, HP etc are all much much higher.

    It’s fairly easy to see who is getting the better deal when it comes to going into debt! As such, any tax cuts delivered via borrowing (whether directly, or by proxy through borrowing for public services) connected hand-in-hand to sensible policies designed to reduce household debt, can only be a good thing

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