Tax cuts for rich at heart of debt problem

Written By: - Date published: 6:19 am, December 14th, 2010 - 49 comments
Categories: tax - Tags: , ,

Remember during the 2008 campaign when John Key was telling us we didn’t have a debt problem, we had a growth problem? Well, now he’s admitting we’ve got both. That’s pretty sharp work: just two years to leave one of the best government balance sheets in the world in tatters. Key can blame misfortune, but he’s the one who slashed tax revenue.

To be sure, the country has gone through a rough patch of extraordinary events that have an impact of the government’s books: the South Canterbury Finance collapse, the Christchurch Earthquake, the Kiwifruit scare, and, now the loss of Pike River as a mine and the costs associated with the human tragedy.

But that’s exactly why responsible government like the last Labour government don’t run their books so close to the edge in the first place – a couple of pushes and we’re over. Even in 2008, with the economy slowing and an election with tax cuts as the major issue, Michael Cullen refused to let the surplus get below his “comfort point” – a surplus of 0.7% of GDP and net financial assets steady of GDP*. Cullen realised that things can go wrong and that a good part of the government’s financial assets are set aside specifically as insurance to pay when they do (the EQC Fund being one).

Key and Bill English gambled that nothing would go wrong. They looked at the healthy books, ignored that a lot of that money is, in effect, Kiwis’ accumulated insurance premiums, and said ‘well, we can afford to borrow more for tax cuts’.

Which is what they proceeded to do.

Under Urgency in December 2008 the Nats canceled the second and third tranches of the Cullen cuts and replaced them with more expensive cuts targeting the wealthy. Only the first round of National’s cuts were delivered, the subsequent tranches were canceled – under Urgency – when the Government suddenly realised that we were in the middle of the biggest economic crisis since the Great Depression and couldn’t afford more cuts. Nonetheless, the tax cuts that did come into effect – targeted at the wealthiest New Zealanders, meant another $1.5 billion a year in borrowing (they thought it would only cost a billion, oops).

Then, late last year, the government passed what was basically a tax cut for polluters. Rather than pay for the carbon credits they owe for their emissions, polluters now get half of them free at a capped price. This tax cut for polluters is costing a billion dollars.

By Budget time this year, Key and English had decided that the country could, after all, afford to borrow more for yet more tax cuts targeted at the rich (ironically, if the Nats had kept their 2008 package in place the second round coming in during 2010 would have been reasonably fairly distributed). So they borrowed to another half billion over and above with the offsetting GST rise etc.

That’s $3 billion per year of additional debt because of Key’s tax cut mania. Couple that with some bad luck and it’s no wonder government debt is shooting out to what even Key admits is ‘the limit‘. But you can’t blame the bad luck: disasters happen, which is exactly why a government should keep a buffer and not borrow for tax cuts.

Kiwis (well, the richest ones) have had three rounds of income tax cuts in two years. Yet 70% of people say they haven’t noticed any effect from their tax cuts, which Key says leaves him “a little surprised, actually”. If only he was a little less surprised now and a little more prudent in the past.

When we hear just how bad the government’s books are today, remember that National made them so bad by borrowing $3 billion a year for tax cuts that no-one noticed, and it’s likely to go into the next election promising more of the same.

* what the hell was Colin James talking about when he wrote: “[English] aims to eliminate the structural budget deficit built in Labour’s later years by 2015-16”? There was no deficit in any out-year in any Labour Budget. James has been listening to English’s lies again and not bothering to factcheck.

49 comments on “Tax cuts for rich at heart of debt problem”

  1. BLiP 1

    Stop the presses: John Key is “surprised”. Still, can’t complain really, at least he’s not “relaxed” any more. Perhaps one day he will learn the difference between “average wage” and “mean wage” – and fucking mean it is too. The international banksters must be rubbing their hands in glee as each billion dollars of debt John Key pumps into the economy brings them just that little bit closer to the silver ware.

    • ZeeBop 1.1

      Key comes from a state house, he rose to the top of a dog eat dog finance sector, his
      obvious competiveness screw you attitude shines out his beady eyes. But don’t mistake
      the anger, he is after all a kid from the handout who hates handouts, hates giving them,
      and so hates having had them. Someone who took from the wealthy, with so much
      ingratitude, who spent his life out performing the wealthy, why would he stop when
      he become PM? Now look at his policies, handing the profits back from, how did
      Buffet put it, “society is responsible for a very significant percentage of what I’ve earned.”
      But if that’s true, doesn’t society deserve a very significant share of what he has earned?.
      Buffet is a good capitalist, he invest time in knowing his managers, knowing they are
      there to make good profits not shon-key profits.
      Now I was taught you get Nowt for Nowt, and letting the rich retain taxes will have social
      costs on future governments and the economy. So why would Key short the rich?
      Sell low, buy high? What is Key buying? Well he gets to get richer while those who
      paid for his own welfare, get to be losers. Key is after all a winner, and the target
      of all his attention has always been on the rich, and making himself richer, sometimes
      with them, but mostly at someones expense. So, of course Key wants to give the
      few a tax cut, its short, its cheap, the risk is hidden, and Key has his corner already worked
      out. Don’t say I didn’t warn you. Past behavior, is…. Key marches counter to one of the
      best capitalists in the world should cause you concern for your wallet.

      • dave brown 1.1.1

        I thought it was clear, Key was buying the Government. He’s managing risk by owning the state. Its more sophisticated and profitable than betting on the currency.
        There’s no mania, only management. No moral hazard but moral highground.
        The NACTs are not close to the edge they are pushing us to the edge. The tax cuts were not a mistake but vital to maintaining their class interests, and rescuing slumping profits. Which are slumping by the way because they can’t otherwise screw more out of us on the job. So the backdoor is to scream deficit, rip into austerity, and mortgage our wages for generations.
        Its their way out of the crisis and our way of paying for it. When you own the Government you pass on all the costs to workers blaming external forces, nature, and of course too much state regulation driven by evil union conspiracies to improve on the market.
        Things could be changing…

  2. One in five kiwi kids needs a welfare cheque to stay alive each week. The land of milk and honey.Yeah Right ! Go fuck yourself John Key and all your disgraceful cronies. Anybody that says they’re proud to be a kiwi must be as twisted as big bruv. What has happened to this country Aunty Helen you vile creature! My advice to parents, send your children to Australia where they help out families.Have another piss up Key you viper!

    Kiwi kids need help.

  3. higherstandard 3

    Until there is some honesty about why we have such a debt problem and a non-partisan debate about what we can and can’t afford I despair for any solutions.

    • Marty G 3.1

      If we return tax levels to what they were when the economy was last growing at above-trend (say, 2004), then you’ll raise about $5 billion – the structural deficit will disappear and you’ll only have a smaller cyclical deficit and the cost of ‘one-off”s like the earthquake

      • Swampy 3.1.1

        Just tell us that you have never advocated increased government spending or fiscal stimulus as so many posters here are

        Tax cuts are a fiscal stimulus.

        • Marty G 3.1.1.1

          actually, the evidence is that they’re weak stimulus, if stimulus at all. It especially matters where you target the cuts. Giving them to the rich certainly isn’t stimulatory.

          However, investing in public services is stimulatory and the most stimulus for your buck comes from poverty-reduction spending.

          see, for example, Mark Zandi’s testimony to congress: http://www.scribd.com/doc/34326486/Perspectives-on-the-Economy-Mark-Zandi-Testimony

          • Colonial Viper 3.1.1.1.1

            Tax cuts are a fiscal stimulus.

            I’d suggest that tax cuts aimed at those earning the average wage and less would be an effective fiscal stimulus. (Made less so by the debt burden held by those households)

            Tax cuts for the rich – frankly the rich can’t eat any more, can’t wear any more clothes, aren’t going to put in a third and fourth spa pool, so that money gets invested – probably offshore ASAP, or rebuilding an asset bubble making homes less affordable.

      • luva 3.1.2

        Yes Marty. It is as simple as that.

        • mickysavage 3.1.2.1

          Tax cuts for the wealthy provide a fiscal stimulus for companies that manufacture large screen TVs, luxury cars or provide overseas holidays. The benefit to the New Zealand economy is nil. The downside is that resources flow out of the local economy thereby depressing it.

          Sorry this is not a one line slogan but economics is not like that.

    • lprent 3.2

      The basic problem is that the government has to be able to pay for it’s obligations. But I’d guess that you are just about to suggest the usual idiocy of welfare bashing instead. Ignoring the lessons of the 90’s about how it kills economic growth

      In this case we have a government who chose to cut its revenue while not reducing it’s costs (because it could not get significiant savings around the edges), in a time when it has rising costs. It was praying that it’s true faith in the ability of tax cuts to simulate the economy would pull them though. But since tax cuts don’t usually have significant effects when they were already low, that was just neolib faith pissing into the wind and having it’s usual deletious effect of being worse than any alternatives.

      Of course they also put up GST to pay fo the last tax cuts, which further helped to depress the economy as it cuts disproportionally into the discretionary of those low to mid income families with people earning.

      A responsible and fiscally prudent government would not have done tax cuts and if they did, then would now be looking to increase taxes. This one will again take the stupid and risky approach of trying to change welfare systems in the middle of a recession. Based on past experience this will extend the recession and make it hard to take advantage of any growth there is available because people lose skills rapidly when they are pushed below the poverty line.

      That is the non-partisan debate we should be having. It is rather pointless until this idiot government raises taxes because we can’t afford the debt they are creating. Changes to welfare systems take a lot of time to move into the economy successfully. They always cost more in the short term than they save in real terms. Talking about doing them when the government is strapt is just silly.

      • M 3.2.1

        lprent, I don’t know that the poorest and most vulnerable can ever recover from the double whammy of meagre tax cuts and increased GST because as peak oil makes it peresence felt all growth in the system will drop away quite quickly and improvements in people’s lot is predicated on future growth that just won’t be there.

        I agree with you that taxes need to be raised for the top earners who enjoyed the recent windfall at the expense of everyone else. I very much like David Harvey’s comment that development is not the same as growth and government and individuals will need to become much more resourceful due to dwindling energy and mineral supplies. For instance, I can sew quite well and have made curtains for my whole house rather than spending outrageous sums on having them made because I know that most of the money goes into the pockets of the business owners and not the person making the curtains and this is a skill I could pass on to someone else to help them make clothes, curtains, school costumes etc.

        As usual welfare recipients are easy to demonise as they are perceived as low status and it’s very hard to make others see that bad luck can happen at anytime for anyone. Often perceptions change only when those looking down at others from on high have bad things happen to them and want all the sympathy in the world and even worse once they’re back on their feet they return to their old judgmental ways.

        • lprent 3.2.1.1

          Agreed that the rising cost of fuel is going to impact pretty strongly. But it is almost a separate issue

          What annoys me is that the ritualistic beneficiary bashing that National like doing is completely counter-productive to any recovery.

          Their view appears to be that making it impossible to live on the benefit encourages people to go and seek work. They’re correct, when there are jobs available. But in fact not decreasing benefits when there is work available has exactly the same effect because it is rare for people to want to live the hand-to-mouth existence on the benefits unless they can’t get work.

          That suggests that National should expend effort to ensure that work is available. But as we all know they are a lazy pack of arseholes and that would involve them having to think and exert effort over a long time – neither of which is a characteristic of Nationals politicians.

          So what they do is a few token efforts like Key’s idiotic cycleway and beneficiary bashing. The cuts from the latter literally makes it almost impossible to seek work or improve skills because most available effort goes into jumping the futile hoops that National puts in at WINZ as they try to drop people from benefits. Consequently there is no resource to either train or move to where work exists (the latter invariably causes WINZ to “lose the file”).

          People literally give up, hunker down, and just concentrate on surviving. Saw it in the 90’s and there are a hell of a lot of people who went through that simply because there was no work, especially for the young. The problem is that they wind up being slow to find work when work is available. They have no resources to hunt for work and work experience and no skills that employers want. It massively slows any recovery.

          Basically National politicians are fuckwits who should get dumped on the dole for a couple of months in ummm Kawerau with no assets to help them train for politician.

          • Draco T Bastard 3.2.1.1.1

            Couple of months wouldn’t be enough – it’d have to be a couple of years minimum.

            • M 3.2.1.1.1.1

              Agreed DTB as a couple of months would hardly give them an inkling of what grinding poverty is, the hopelessness of sinking further and further into debt and despair, and knowing that in all likelihood there is no end in sight to their plight.

              Politicians doing it “hard” for a couple of months at least know that there is an end in sight and a beacon of hope so their suffering would be much more bearable.

              NZers please wise up and turf out these reptiles.

              • mcflock

                didn’t they try that in the early 90s? ISTR Shipley wanted to demonstrated that the cut benefits were perfectly liveable. I think she managed a day or two before she “got sick” and had to go back to her ministerial income – because beneficiaries can do that whenever they get sick, too

                • felix

                  She started with a kitchen full of food, a nice warm house full of all her nice things, all her bills paid and a tank full of gas in every car she owned…

                  …and she still couldn’t make it for a week.

                  So did the experience cause her to rethink her neolib attitude to those less fortunate than herself? Did it fuck.

                  • prism

                    The O’Regan woman Katherine I think, also had a go at ‘living like the simple people do’ (Camelot film)

                    • Jum

                      Yes, it was Katherine O’Regan. She was so proud that she had survived living on the benefit for a month, I think it was, and so could everyone else, before she tripped gaily back to her real life.

                      Spot the problem – ‘hope’ and lack of. Spot the pondscum thinking and its cheerleader – Paula Bennett.

                      Is there a link to O’regan’s ‘experiment’?

  4. PC Brigadier 4

    Frame the debate Phil Goff. That Key can get these cuts through, maintain such a deficit and increase his polling majority says as much for the opposition as it does Key’s PR team. Both are bastards IMO.

    • Swampy 4.1

      Mr Goff has not got a chance
      Every time National cuts something off govermnemtn spending look at the outrage you know

      There is not much change of Labour getting traction when they increased govermemnt spendingf so much in the last terms that he was part of

  5. Swampy 5

    No the tax cuts are not the heart of the problem. They are just one of varios polices that all cost money

    It iss simply the fact Labour spent all the money while they had it leaving their susccesor with a big debt well Labour should of held back Its like 1990 all over again and I guess Labour will be in opposition for a coupl more terms yet because that nice Mr Goff has got to much baggage left from being closely in Helen Clarks goverment.

    • BLiP 5.1

      The funny thing about right-wing dingalings wall papering the site is that they make such twats of themselves in the process. Once again, Swampy calls Blinglish a liar because it wasn’t that long ago the National Ltd™ Minister of Finance was praising Dr Cullen and the Labour government. In his own words just a month after the 2008 election:

      “I want to stress that New Zealand starts from a reasonable position in dealing with the uncertainty of our economic outlook. In New Zealand we have room to respond. This is the rainy day that Government has been saving up for,” he told reporters at the Treasury briefing on the state of the economy and forecasts.

      If Blinglish wasn’t such a poor Minister of Finance himself, he would be saying the same words today. Hopefully, he’ll be replacing them with the words: “because I’ve done such a bad job and because John Key expects higher standards, I’m resigning.” And so he bloody should.

    • Nah Swampy.

      Once upon a time when Labour was in power it paid off lots and lots of debt until the New Zealand Government had no more net debt. Mr Cullen was very wise and saw that when the next depression hit if the Government had no debt it could then borrow and spend so that ordinary Kiwis could keep their jobs and no one would be too unhappy.

      Then National and that nice Mr Key came to power. Instead of spending money locally to keep ordinary kiwis in jobs he decided to give all of his rich mates a tax cut. His rich mates were very happy. They were that happy that they bought nice flashy things from overseas not made by Kiwis and went on lots and lots of overseas holidays. They also made many anonymous donations to Mr Key’s National Party and hoped that he would remain in power so that he could give them even more tax cuts in the future.

      The economy worsened and many Kiwis lost their jobs. But Mr Key kept smiling and waving and did this so much that not that many people realised that he was incompetent and a fool. And some like Swampy even thought that Labour had spent all of the money even though anyone able to read could go to treasury.govt.nz and read many reports saying what a great job Mr Cullen had done and how he had paid off a great deal of debt.

    • Jum 5.3

      I remember those pesky planes that NAct bought just before the ’99 election. Useless purchase.

  6. Swampy 6

    Its all rubbish to say no one has noticed any of the tax cuts
    There is 3 billion more in the ecomomy in peoples pockets from the cuts

    You;re just quibbling over the policies
    Every day we read here National should be spending a lot more on stimulus yet when theyr’ve put 3 billion stimulus in its a waste of time

    You should be thinking the tax cuts are a stimulus and so they are.

    • andy (the other one) 6.1

      I get the impression that because they have collected LESS GST after raising it, the tax cuts are being banked or being used to pay down debt. So are not being stimulitory. Also Petrol at near $2 has wiped out 75% of the populations stimulitory $2.50pw tax cut.

      Wealthy people don’t suddenly start to consume more if they get a tax cut, they just have a larger surplus at the end of the week.

    • Craig Glen Eden 6.2

      One slightly important point which makes a mockery of your three posts Swampy Labour payed back Government debt they didnt spend more than they took in its called being fiscally prudent. Nationals management of the economy has resulted in a growing deficit. That is a fail in anyones balance sheet.

      Most people are not noticing the tax cuts because most of us didn’t get enough to off set other increasing prices and the effects of a failing economy. John Key and his mates open another bottle of their choice while the rest of us have stuff all for Christmas its time for change all right.

    • Marty G 6.3

      “Its all rubbish to say no one has noticed any of the tax cuts
      There is 3 billion more in the ecomomy in peoples pockets from the cuts”

      tell that to the people, the polls disagree with you.

      “You should be thinking the tax cuts are a stimulus and so they are.”

      because the economy has so clearly been stimulated, eh, swampy? She’s going fair gangbusters since the tax swindle took effect.

    • prism 6.4

      If you were being fired out of a cannon Swampy you would like to have a designated landing site. Likewise with government stimulus, just throwing it out at wealthy people isn’t running a recession economy effectively.

      It needed to be spent on infrastructure so we had something lasting at the end. And there would have been workers NOT unemployed, spending the money so essential to them. The rich didn’t need it, all except the previously rich who had lost money on leaky homes and unwise investments – some of them are very hard up.

      Then it happened the NACTs decided to include South Canterbury Fie inappropriately in its guarantee scheme and allowed a rort to happen. Now we have expenditure urgently needed on paying the Pike River contractors for their outlay on rescue gear etc, as well as general wages etc due, Christchurch needs more support to ordinary people as well as inner city buildings, and where is that tax money that was given now we need it back?

  7. MrSmith 7

    I hear WongKey is blaming the Canterbury earthquake for the budget deficit, more bullshit and distraction , ‘Quick look over there.’ I’m off to Hawaii for a break .

    • Bunji 7.1

      Yes I notice bailing out South Canterbury Finance for $1.7 billion didn’t come into the reasons John Key listed… It was all bad weather, (kiwifruit) disease, disaster, you won’t believe the bad luck I’ve been having…

    • luva 7.2

      Where do you hear that?

      • Bunji 7.2.1

        There was a clip of him on CheckPoint last night, saying it was going to be worse than expected due to the earthquake, kiwifruit disease etc (incl. lower GST returns)

    • burt 7.3

      I hear WongKey is blaming the Canterbury earthquake for the budget deficit, more bullshit and distraction

      Yes he should just be honest and blame the useless managers that ran the economy into recession prior to 2008.

      • Craig Glen Eden 7.3.1

        So what would you call the people who have made the situation worse with their management Burt.
        The truth is if we didnt have the ACC Fund and the Super fund which Labour put in place when in power we would be a total Bloody cot case of an economy now.

        What did National say we should do during that time what would they have done more tax cuts that was their only solution. What economic fools! So once in power they get to implement their tax cuts but selectively give most of the money to their rich mates. No wonder middle NZ is hurting.
        Burt Key and English have been running that line for two years but its starting to wear thin especially when we all know including English this is the rainy day Cullen talked about.

      • MrSmith 7.3.2

        Yes that’s what he said Burt and here is how I think the rest of the story will go. Wongkey: “We can’t keep running these big deficits our only option now is asset sales”. Game set and match…..

      • Jum 7.3.3

        burt 7.3
        14 December 2010 at 9:48 am

        “I hear WongKey is blaming the Canterbury earthquake for the budget deficit, more bullshit and distraction”

        Was that you saying Key was wonky; finally you’re accepting the truth. Good lad. Pat on the head for you; now you can have your sweet – a Labour Government in 2011.

        PS I’d have just said he was corrupt. FFS; he even steals a stone from his trip to the Antarctic; jumped into his pocket I heard. It must be a bit full in there with the businessrotundtable, Douglas and Richardson, Shipley and Sammy, zipped up with a blind trust of his own.

      • prism 7.3.4

        Gosh the people on the Standard are kind burt. They keep putting their 2 cents worth into the hat you hand around while the organ grinder plays. I think you enjoy the Pavlovian response from the site to your comments.

  8. Carol 8

    Maybe we could learn from the UK smart-mob protests against tax-avoiding retail chains and other corporates. This results in targeting the corporates who are gaining from tax arrangements, while the poorest people are having austerity visited upon them to compensate:

    http://www.guardian.co.uk/commentisfree/2010/dec/06/tax-dodging-billionaires-protest

    What a clever, well-targeted protest. When the whistle blew and the protesters emerged from among milling shoppers perusing handbags and hats, it took just a few hundred people to shut down Philip Green’s flagship branch of Topshop, in London’s Oxford Street – and 22 other stores in his empire around the country. Summoned by Twitter, the UK Uncut movement brings together an instant army, peaceful, good-natured and witty in its songs and chants. For a while they stopped Green’s tills ringing on the year’s busiest shopping Saturday.

    How do you create culture change? How do you shame companies out of such practices when governments are frightened of their power? Polling evidence suggests that Vodafone has already taken a reputational hit as a result of these protests. Crashing and banging saucepan lids, whistle-blowing and rude chants against companies works where years of pamphlets, meetings and earnest debates cut no ice.

    This week there are daily protests: women were outside the high court today against a budget that cuts 72% from women; tomorrow schools and sports celebrities protest against the axing of the school sports budget; Wednesday and Thursday see two days of student protest. This has hardly begun. Wait for the rest in next year’s great post-April shock. The knack is for protesters to stand on principle and on the side of the public: students are protesting against cuts that hit their successors, not themselves. Everyone is affected by tax dodgers whose lost funds could cover the deficit.

    We could do with some similar imaginative protests, carried out with wit and good humour, well co-ordinated, and done in such a way as to align the protesters with the interests of the masses who are suffering from tax arrangements that benefit the wealthy, the corporates and overseas investors at the expense of ordinary working kiwis

  9. Lanthanide 9

    This, while not an exact quote, is what a clip of Key said on Morning Report this morning:
    “Kiwi families have been saving, compared to the 2000 to 2008 period when they were dis-saving”.

    Seriously: dis-saving. It’s like he just found out “deflation” is different from “dis-inflation” and thought he’d take his learning and show it off.

  10. Dan 10

    Strategic Deficit 101!!!

    • Bunji 10.1

      And there you go.

      Going to have to “tighten spending” – that’s cut public services to you and me – to cope with deficit blow-out. Not remove tax-cuts from the rich, no, that would be ridiculous.

      • Zaphod Beeblebrox 10.1.1

        My tip will be selling of our schoolyards, Housing NZ stock, prisons, water and power utilities and more toll roads. Then our kids can lease them back from the Chinese, Arabs and Australians. Nice inter-generational welath trade off for the tax cuts.

  11. Ianmac from the UAE 11

    NZ’s early entry into the economic downturn was said to be beginning of 2008.
    Labour said that the drought was a significant cause.
    National were loud and often in saying that no, it was about Labour mismanagement.
    Now. A drought is looming. Farmers quitting stock. Farmers debt increasing.
    Will Bill say that the drought will be a cause of recession? He couldn’t could he?

  12. Zeroque 12

    I think reducing Government revenue via tax cuts has caused some of the problem we have now with public debt. It seemed to me that when Labour started cutting taxes (2008?), before the Nats carried it on some people saw the prospect of tax cuts on both occasions as something it wasnt – a way to increase their overall standard of living permanently. Even for many working people it probably looked like the only easy way of getting a boost in light of minimal real wage growth in the preceeding years and thus it became a popular proposition. At some point the debt needs to stop increasing and be paid back. This Govt is apparently not going to do this by increasing taxation but seems intent on doing it through cuts to spending. Surely at some point the call to tax the rich more heavily to achieve this balance rather than screw those who cannot afford it will become an electable message.

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