NZ Initiative – tax cuts are silly at present. I have to agree.

Written By: - Date published: 11:49 am, March 27th, 2024 - 41 comments
Categories: Economy, infrastructure, tax - Tags: ,

I have to say that writing that title made me wonder about the topsy turvey world. I don’t agree with people from New Zealand Initiative often. Mostly I just growl. But Oliver Hartwich who is the Initiative’s Executive Director wrote a paywalled piece in The Australian “Christopher Luxon’s challenge for NZ economy: fiscal discipline or tax cuts“.

I don’t subscribe to The Australian for the obvious reasons1. So I have to go by what Richard Harmon at Politik2 has quoted in his news letter.

Hartwich’s commentary said: “The New Zealand government now faces the urgent task of getting public finances back on track. The first step is to curb spending. Tax cuts at this juncture would only make the
necessary fiscal consolidation more challenging. They would complicate efforts to bring inflation under control. Luxon must therefore choose between restoring fiscal discipline and delivering on an election
promise.”

And: “The lesson for Luxon is clear: in tough economic times, responsible leadership means making difficult decisions in the best interests of the country, even if they may not be politically
convenient.

“With New Zealand’s inflation still running at around 5 per cent and the economy operating near capacity, a fiscal stimulus in the form of tax cuts risks exacerbating inflationary pressures. As the Truss debacle demonstrates, attempting to stimulate the economy with borrowed money in a supply-constrained, inflationary environment can be disastrous.

POLITIKToday March 27, 2024 THE NATS LOSE ANOTHER SUPPORTER OVER THE TAX CUTS

This isn’t exactly news, but there has been a chorus of opinions from in recent weeks from the right and centre in recent weeks about the economic stupidity of going on with tax cuts in a full-blown recession that has been obvious since early year. Tax cuts that will happen while the government is simultaneously planning on :-

  • A program of austerity cost reductions in the government which invariably increase medium-term costs directly and indirectly to implement. That ignores the downstream costs of the chaos this will cause in a recession. For instance the current abrupt freeze on virtually all consulting and contracting by government is going to have some interesting and immediate detrimental knock-on effects, even before the government starts laying off public service staff.
  • A massively expensive program of infrastructural maintenance spending which has very small short-term economic benefits, but is long overdue. This includes all of the maintenance that was intended in the Three Waters program which will now immediately impact in rates.
  • A program of new infrastructure that appears to have not been even remotely costed yet. But will probably have negligible or no economic benefits for doing.

Recessions always cause tax takes to drop significantly. Tax cuts will always reduce the amount of money that the government has to spend or to pay down debt.

Sure, they simulate the economy a bit in a very short term way. But since most of the benefit will be to those on higher incomes (usually like me), the effect is mostly straight inflationary and has few economic benefits. It will just increase demand for non-productive luxury goods and services in a economy in a market that is already constrained in capacity and having price inflation.

Buying excessively expensive property or imported vehicles or gadgets doesn’t do much to increase the capacity or productivity of the economy – and right now that is where most of the projected tax cuts will be spent.

And if they are spent on basics like rentals and food, they will just put more price pressure on a constrained capacity – increasing price inflation.

Restructuring and infrastructure may have positive longer term effects but they seldom give little immediate economic benefit. They just cost a lot in the short to medium term.

This appears to be obvious to anyone who isn’t living in the warm post-election flush of joy at sitting on the government benches. Yesterdays Politik Today (links are to paywalled NZ Herald opinion pieces)…

The Government is up against it over the cuts just about every way it turns. Commentators like Fran O’Sullivan, Matthew Hooton, and Liam Dann have all argued that the cuts should be at least be postponed or moderated, if not scrapped altogether.

At the same time, the CTU economist and former economic advisor to Grant Robertson, Craig Renney, is saying the fiscal hole created by the cuts is growing.

Meanwhile, the Prime Minister has said he agrees with the International Monetary Fund that New Zealand is facing a structural fiscal deficit that will open up within the next few years.

POLITIKToday March 26, 2024 WILLIS IS NOT FOR TURNING

Sure, we badly need to upgrade a lot of our infrastructure. The lack of patch maintenance during the pandemic and extreme weather from climate shifts last year really highlighted that. Plus now the massive influx of inwards migration at the start and after the pandemic response has ended. We really need to upgrade stressed and already ageing and overloaded infrastructural base. That has largely been left inadequately fallow during the ever increasing inwards migration flood since the mid 2000s. Most of it was actually built 50-80 years ago for a much smaller population, and was definitely not designed for the kind of weather we had last year, which will happen more frequently.

But doing that while also reducing the government’s tax take while in a recession and with the government policies accentuating the depth of the recession is simply stupid. Anyone can see that – even people who don’t think long-term.


  1. The Australian is owned by News Corp, their editorial line is self described as “centre-right”. I tend find it populist, short-sighted, and rather full of self-righteous bigotry with ill-informed stupidity. It is also the cheer-leader for the fossil carbon extraction and burn industry (I did say short-sighted didn’t I). Basically it makes some of our local dimwitted idiots like Mike Hosking look well-informed and moderate. ↩︎
  2. Politik is something that I do subscribe to. I was dumping subscriptions last month because of a sudden redundancy and a possible forthcoming shift to open source coding relying on super and savings (I turn 65 in June). I dumped subscriptions to a lot of news and current affairs including The Economist that I have been reading weekly for the last 35 years. But I prepaid Politik for the whole year. Can’t give it more praise than that. ↩︎

41 comments on “NZ Initiative – tax cuts are silly at present. I have to agree. ”

  1. SPC 1

    I suspect the government will appreciate the wisdom of turning – to accept a higher debt to GDP.

    However their problem will be that the cause should be more investment in infrastructure, not a decline in government revenue.

    The IMF wants CGT and land tax for a reason.

    If not, they can consider alternatives. An estates tax. A stamp duty on houses over $2M – the Oz domestic rate is about 5% at this level.

    A windfall profits tax on banks. 5% on $6B of profits is $300M.

    At the moment it can be predicted with rising rents and 25 cents an hour MW increase there will be less GST revenue (less non rent spending). Things will be worse than they anticipate.

    We may face a period of "21st C stagflation" – where because of infrastructure shortages (rent/rates/insurance) inflation does not fall below 3% but hovers around this level with 0-1% growth (borderline recession).

    The government will regret the focus on roads (poor use of debt finance/resources).

    The RB could be stuck with a OCR around 4.5-5% for some time.

    HOUSING

    The 5 year low in building consents means a looming decline in building activity (real infrastructure economy decline) – thus both a continuing shortage of housing and declining company tax revenue.

    This in a country with limited social housing and a growing number of aging workers working to afford market rents. They will not be able to continue to do this much longer.

    And for those in social housing – is there enough aged care housing for them?

    If easier consents for small build does not work – this government will have to look at trailer parks/containers for families and social housing.

  2. observer 2

    It's a slow burner, but the government's deception on tax cuts and their borrowing really is starting to hurt them.

    As suggested in the OP, there is more and more criticism coming from the Right, not because they are now cheerleaders for the opposition, but simply because they can count. The numbers don't add up, and in fact never did.

    Live updates: Government doesn't lay out key information in first Budget statement in breach of convention | Newshub

  3. Ad 3

    I want tax cuts in which everyone just above my bracket pays tonnes more and the unemployed and NZSuper pay no tax.

    • dv 3.1

      NzSuper is taxed

      • SPC 3.1.1

        So are benefits.

        https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-income/benefits-nz-superannuation-student-allowance

        Tax free income would require a threshold above those payment levels.

        That said super (for a couple) is assessed as a percentage of the net after tax average wage.

        • Craig H 3.1.1.1

          Benefits are set net of tax based on M tax code, so tax-free thresholds have to be explicitly passed onto benefits or they don't help.

          • SPC 3.1.1.1.1

            There is a gross amount with tax deducted off it.

            So technically, if they did have an income tax exemption up to the gross level …

            • Craig H 3.1.1.1.1.1

              I missed this at the time, but the way the Social Security Act is worded, MSD and IRD agree the tax figure and add it on to make a gross figure from which tax is deducted to arrive at the right net figure, rather than the usual way of there being a gross figure and tax calculated on that and deducted. If there is a 0-rated tax bracket, then the tax figure would take that into account and would be less when added (or 0 if the whole benefit is in the 0-rated tax bracket).

              That said, the policy advice around benefit increases would point that out, so cabinet would have the option to increase the net figures accordingly, but it wouldn't be automatic.

        • Descendant Of Smith 3.1.1.2

          Benefits never used to be taxed but Douglas and ilk worked out that if you made them taxable and you were only on benefit for part of the year you could claw some benefit cost back through the tax system.

          It is a disingenuous and viscous form of taxation because the benefits remain paid at net rates and the government tops up the PAYE. This means that when there are tax cuts those on benefits get no more money. NZS on the other hand is paid at a gross rate and they do get more money when there are tax cuts.

          In my view not only should benefits be increased they should also be made non-taxable again.

          This is just another way that Grant Robinson was incorrect when he said things had been restored.

          The other two were:
          A. The impact of benefits not being linked to average wage for years making them fall further and further behind NZS. That has a longer term and more pernicious effect than the $20-00 off ever did
          B. The change of the youth rate from under 18 to under 25. 18-24 year olds got a quadruple whammy.

          They really were a pack of evil bastards.

          • Nic the NZer 3.1.1.2.1

            Expectation would be that were benefits made non-taxable the basis for their calculation (net-of-tax) would also be adjusted however? I don't see how that change makes anybody better off. I can see how making the underlying benefit calculation be the gross amount would lead to any tax cuts increasing benefits payments however. The difference seems mostly in appearances where the published benefit rates are higher than the amount in hand (as is salary or wages) and some people will assume incorrectly that this is an amount received in hand without considering the PAYE component.

            • Descendant Of Smith 3.1.1.2.1.1

              You'd be better off because when you went to work the benefit amount would not form part of your taxable income. You basically would keep it all.

              Benefit rates were not altered when they became taxable – fake PAYE was just added on top.

              • Nic the NZer

                Ok, but this only can shift someone's tax band up on further salary and wage payments, but on these payments people do benefit from PAYE rate and band changes along with everybody else.

                • Descendant Of Smith

                  No those on benefit do not. They get zero increase when tax cuts are made. The government just reduces the fake PAYE payment to itself.

  4. Nic the NZer 4

    Putting it simplistically, cutting the government deficit in response to a recession is well known to be the wrong policy. The government deficit (or surplus) shows up directly in GDP statistics by adding directly to GDP. For a country which can determine the size of its budget this makes having a recession essentially voluntary. During the great recession Australia made an unusual choice and in fact decided not to have a recession. This they succeeded at by a range of tax cuts and not generally cutting into their national budget, so yes this works there are well known examples.

    There are actually two separate issues regarding the handling of the NZ economy which is officially in recession. One is the governments promise to produce tax cuts if elected. The other is the governments promise to cut spending on the public sector if elected. These two are linked by the present level of government debt targets which are also a voluntary choice of the present government. As multiple commentators have pointed out NZ government debt is quite low compared to most countries (and more broadly it doesn't have any impacts on the NZ governments ability to spend, its not a budget constraint and its been really difficult for economic studies to demonstrate it has any negative impacts on the economy, e.g see Japan at 263% of GDP govt debt simultaneously having one of the flattest inflation impacts recently).

    The problem with the tax cuts is they are likely to be very weak way to increase GDP because a lot of the tax cuts go to the pocket of people who directly save the money, rather than spending it.

    So we are presently having a voluntary recession and our response should take into account that we will likely make that worse if the government trades off tax cuts for public spending cuts and tries to balance these in the budget in terms of its long term debt targets. If we give up on balancing the budget towards an arbitrary target then the recession could rapidly be ended (though this requires breaking the governments promise to cut the public sector).

    It should also be noted that the budget forecast of the deficit is often wrong (over or under) by billions of dollars over even a six month time frame. This should make it clear how relevant those millions of dollars in debatable penny pinches from government departments are to the debt position goals.

    • Traveller 4.1

      "…and more broadly it doesn't have any impacts on the NZ governments ability to spend, "

      It does, in two ways:

      1. The cost of servicing the debt. This is money that could be better directed.

      2. The premium (and potentially limitations) on future borrowings.

      "e.g see Japan at 263% of GDP govt debt simultaneously having one of the flattest inflation impacts recently"

      Well Japan didn't intentionally accumulate that level of debt. It's genesis goes back to the crash of the Nikkei in 1992, and the subsequent bail out of the banks. And it's not something that we should should aspire to, given "Japan spent 22% of its annual budget on debt redemption and interest payment last year, more than the 15% spent on public works, education and defense combined." Japan's debt time bomb to complicate BOJ exit path | Reuters

      • SPC 4.1.1

        A nation can have low debt and yet because of a lack of infrastructure investment is not (or no longer) a first world nation.

        So there is a cost in believing that having a debt to service is spending money unwisely.

        • Traveller 4.1.1.1

          I'm not arguing that. As your comment rightly points out, debt is an instrument that can be used for productive purposes. My argument is that debt has a cost, and the higher the debt, the higher the cost.

      • Nic the NZer 4.1.2

        Japan for example has zero problems with it's spending, including its spending on interest. The argument your making is kind of the head line outcome of some models which try to estimate supposed debt limits, but these factors alone are not sufficient to form a problematic constraint on budgets you also need to assume that the amount of deficit spending is generating inflation (which these models often do). So if you imagine that interest payments will become a big part of the budget and you will be generating large inflation as a result of the budget deficit size then you can model a conclusion where the government has a strong budget constraint. In practice this model for inflation is vastly unrealistic.

        Japan's inflation is low, probably considered too low and below the BOJ targets. It also pays a lot of its interest directly to the BOJ which ultimately buys a lot of the govt debt.

        The most important thing about government debt is its connection to monetary policy. If we didn't borrow the deficit then there would usually be surplus bank clearing funds and the link between the OCR and the 90-day bills rate would become disconnected. This means the effective monetary policy rate would be around 0%. So the government pays over interest to soak up these excess funds and this allows the RBNZ to raise the OCR as it sees fit (which is also why QE only occurs with an effectively 0% OCR rate.

        And no, I don't think the economy cares that much if govt debt was accumulated intentionally or by some kind of accident or miss-judgement.

        • Traveller 4.1.2.1

          IMHO you're digging a big hole holding up Japan as an example. Inflation in Japan is low in part because a) it has low consumer demand, driven by a falling and aging population and b) low wages – partly due to around 1/3 of all jobs being part time or contract. NZ is not Japan, nor do we necessarily want to be.

          "So if you imagine that interest payments will become a big part of the budget and you will be generating large inflation as a result of the budget deficit size then you can model a conclusion where the government has a strong budget constraint. In practice this model for inflation is vastly unrealistic."

          Modelling? If a country has debt, it pays interest on that debt. The more debt, the higher the interest it pays, and eventually if it gets high enough that interest rates from lenders rise and the imposition of cost on an economy becomes crippling. This is not 'modelling' it is real life.

          • Nic the NZer 4.1.2.1.1

            The point about Japan is not that its economic outcomes are desirable, the point is just that its economy is an example of how the economy works and if your model is saying Japan can't possibly maintain its government spending without consequences (repeatedly for 20 years BTW) then that forecast should come true at some point, or your model is just incorrect.

            And you seem to want to discuss actual outcomes of government debt. Well its a claim that high interest rates are a consequence of high government debt. The reason to discuss modeling is because some models might make the assumption that at some point high government debt will lead to high rates of interest imposed by lenders. Is that real life however? Well no, in practice the BOJ pretty regularly imposes negative real interest rates or even negative nominal rates on government debt with plenty of buyers. Its another consequence of govt debt serving a monetary policy function. and that's just sticking to so called conventional monetary policy and not simply having the treasury to spend directly on the RBNZ balance sheet and leaving the monetary policy rate at zero indefinitely.

            • Descendant Of Smith 4.1.2.1.1.1

              US debt runs at 121% of GDP, Singapore at 134%, UK at 102%, India at 83%, China at 77%, Finland at 74%, Germany at 66%, Australia at 55%.

              Even on a per capita level we are well below the US $46,645, Ireland $47,822, France $41,040, Australia $21,695

              NZ a paltry $13,180 per head.

              https://en.wikipedia.org/wiki/List_of_countries_by_government_debt#Public_debt_per_capita

            • Traveller 4.1.2.1.1.2

              "…if your model is saying Japan can't possibly maintain its government spending without consequences (repeatedly for 20 years BTW) then that forecast should come true at some point, or your model is just incorrect."

              An economy is a set of complex moving parts. However your comment is fair. The question is, what consequences are you prepared to bear. For example, what % of government spending are you prepared to sacrifice away from other spending (Japan's population problem forces changes to social security – DW – 11/07/2022)? What level of debt are you prepared to leave to future generations? ("That could end up creating another crisis. And even if it doesn't, the bill being left for the next generation is frightening." Japan's high-spending legacy – BBC News). Are you prepared to run deficits to finance the debt (Do deficits matter? Japan shows they do. – Atlantic Council). These are real consequences for japan.

              "While the exact outcome will depend on policy choices, any alternatives will entail some difficult tradeoffs—despite what some economists say, there is no free lunch in running large public deficits and building up debt. Japan has paid heavily for its high public sector debt through slower economic growth brought about by net household and corporate lending."

              Do deficits matter? Japan shows they do. – Atlantic Council

              • Nic the NZer

                I'm still throwing that what consequences are you prepared to bear back to what are the actual consequences. The consequence of slowed economic growth being down to excessive debt was the subject of the paper 'Growth in a time of Debt'. This paper was unfortunately very influential following the great recession.

                https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt

                This paper claimed there was a threshold for public debt over which GDP growth would as a consequence be measurably slowed. Putting most of the criticisms aside, including the spreadsheet errors there is one most relevant flaw in the methodology "any correspondence between debt levels and insufficient economic growth could just as easily be reversed: it is the weak economic growth that leads to the high debt levels." and this seems to be the most obvious description of what is happening in Japan following on from the Asian financial crisis with an aging population. I mean the government debt most certainly has not caused the demographic shifts which is clearly a big factor in their economy, in fact it would be difficult to attribute any of the factors you mentioned to causes of impacts on their economy rather than consequences of those impacts on their economy.

                This quote from Paul Krugman seems to summarize the claim that government debt is slowing the economy.

                "What the Reinhart-Rogoff affair shows is the extent to which austerity has been sold on false pretenses. For three years, the turn to austerity has been presented not as a choice but as a necessity. Economic research, austerity advocates insisted, showed that terrible things happen once debt exceeds 90 percent of G.D.P. But "economic research" showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to."

                The available evidence only demonstrates that New Zealand would be better off avoiding the voluntary recession rather than worrying about the deficit, in fact it seems to demonstrate that the govt debt level is largely irrelevant.

                • Traveller

                  I disagree. I've laid out the costs of high levels of debt; even in the most extreme circumstances, eventually the chickens come home to roost. Why Japan’s economy remains a warning to others (economist.com)

                  • Nic the NZer

                    Well you do appear to be disagreeing with the most recent "economic research" on the effects of debt on growth rates (are there more recent empirical studies supporting your contention?). At this point there has been 30-years of these policies in Japan and 15-years of similar policies in many many countries so its really beyond time for some of these catastrophizations to appear. Arguably much longer and broader depending on where you level the bar for government's blithely actually ignore that deficit policies.

                    And on the other side we have a rich history of governments paying very close attention to their deficits and debt ratios, introducing austerity and that either damaging the economy so badly their debt ratios worsened (e.g the Greek eurozone crisis response) or merely causing large well documented harms to their countries and economies (e.g UK's Osborne austerity drive).

                    I don't expect National will go as far as inducing a repeat of NZ's 1990's recession, but we should recognize that NZ's govt debt ratio's are a terrible reason to introduce or exacerbate an avoidable recession at all.

                    • Traveller

                      What ‘research’? As I’ve pointed out, Japan is hardly a good example in support of higher debt.

                    • Nic the NZer

                      Again, Japan isn't an argument in favor of higher debt, I'm not making an argument for higher debt. What I am saying is that there are more pressing economic concerns than the debt level even for Japan as evidenced by the visible consequences. And at the same time it is also worth highlighting how poorly the austerity programs put forward as necessary to deal with government debt levels actually perform, frequently failing in their own terms while doing tremendous easily measurable damage to the countries they are inflicted on.

                      The recession NZ is embarking on is entirely optional and should be avoided.

                  • SPC

                    Japan's declining population makes it a less than optimum nation to use as an example of the consequences of high debt.

                    It has lower growth and lower inflation than other nations would.

                    It has reduced impost on workforce via robotics and will again with AI but has weak domestic demand.

            • Descendant Of Smith 4.1.2.1.1.3

              It is more a consequence of not taxing enough for an entirely forecastable problem.

              It isn't really about how much debt you want to tolerate – it is about being arseholes, kowtowing to the rich, deliberately reducing the tax take from the well-off and then blaming the poor. It has nothing to do with economics but everything to do with politics and influence.

              Simply put if it was about economics we would have made provision in past years for an aging population. Economics clearly tells you those costs are coming in an easily forecastable way.

              Just as economics tells you if you increase immigration and reduce / not increase housing supply house prices will go up and rents will go up.

              Economics tells us that we should tax capital gains. These are not economic problems.

          • thinker 4.1.2.1.2

            Plus Japan's debt is one of the highest debt-to-gdp in the world.

            If Japan is the poster child, then we would have a lot of debt headroom in NZ.

            • Traveller 4.1.2.1.2.1

              Agreed. If considerably higher debt was the answer, why have any limit at all? Just solve all of today's problems by borrowing, and leave the consequences for tomorrow.

  5. Descendant Of Smith 5

    It has also been deliberate to move money from consumer spending to bank profits by lifting interest rates. I'm not really sure why some of the small business people I know support this and then complain about having no customer spending at the same time.

    It is like when Ruth cut benefits. Where I lived at the time we watched about 40 businesses go under over the following six months. It took millions of dollars out of the local economy.

    Public service cuts will do the same no doubt. It won't just be a Wellington cut as people seem to think. One policy Labour could adopt is less jobs in Wellington and more in the regions. It is partly where Wayne Brown is right – much of the regional tax take gets spent in Wellington.

    • SPC 5.1

      During the 5th Labour government RBG Bollard asked for the option of a mortgage surcharge to counter inflation – he was responding to exporter concerns that raising the OCR and dollar was reducing their income.

      Of course it would also increase government revenue significantly, and thus counter any negative impact on the government budget of diminished spending in the private sector to reduce inflationary pressures.

      PS I advised the policy to Cullen a few years earlier, one does not win them all – fortunately GR also wanted interest free loans and Clark agreed to end the school closure programme (selling off land rising in value was not good management) SPC 1 the duck 0.

      WE said it would be a brave Finance Minister who gave Bollard what he wanted.

  6. Mike the Lefty 6

    Tax cuts WILL go ahead.

    They will go ahead because I believe this was one of the secret clauses in the coalition agreement demanded by ACT.

    ACT and their rich list mates made tax cuts a bottom line and if National reneges on this ACT could retaliate by voting against specific government legislation – nothing very important of course, but symbolic and embarrassing.

    As I write this, I wonder whether ACT's failure to vote against a Labour party amendment in parliament which lowered the RUC for hybrid vehicles was not a blunder, perhaps it was a deliberate subtle warning to National that tax cuts WILL go ahead, or you will be sorry!

    It wouldn't matter a jot to ACT whether the tax cuts bankrupted the country. All they care about is getting a lot more figures in their bank account balances.

    • Jimmy 6.1

      I hope they give the tax cuts by adjusting the lower tax brackets. Then we all benefit.

      • UncookedSelachimorpha 6.1.1

        A tax-free threshold for income below 18k, would be great!

        Aussie is tax-free to $18.2k, while in New Zealand we tax income from dollar zero – no tax-free threshold at all.

    • georgecom 6.2

      introduce a CGT and if the govt wants allocate some of the income to lifting tax thresholds. Funny though, I thought Luxon and Willis were rock solid on their costings before the election. Willis now struggling to fill the big fiscal hole in her tax cut policy. Not only a bad time to introduce tax cuts, rather than devote the money to core govt services and shrink the budget deficit, but Luxon and Willis will also add to government debt to do so

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