Tax or quality public services – which is more important to NZ voters?

Written By: - Date published: 10:31 pm, September 27th, 2023 - 16 comments
Categories: budget 2023, capital gains, chris hipkins, Economy, economy, election 2023, elections, grant robertson, greens, gst, health, labour, Long Read, maori party, tax - Tags: , , , , , ,

Originally published on Nick Kelly’s blog

Earlier this year Andrew Marr wrote in the New Statesmen, that Britain’s problem was that it wanted Scandinavian levels of Public Services and North American levels of taxation. His view was that Britain was overdue for an honest debate about tax and public spending.

In New Zealand, there is a similar challenge. Politicians from the right have for decades put forward the myth that tax cuts will foster economic growth and be better for the economy. They instead lead to spending cuts, higher levels of user-pays and a deterioration of the public sector. Voters really dislike this, and demand governments fix the problem. Labour and other progressive parties will answer this call and promise to fix the health, education, public transport etc. Yet shy when the debate moves to funding these public services through taxation, too often the issue is fudged.

In New Zealand, a Labour Government is seeking re-election after six years in office. Though having made some decent moves, especially in the health system, it is clear that greater investment and improvements in public services are needed. Yet Labour has recently ruled out introducing a wealth or capital gains tax. There are strong arguments either way regarding these two forms of taxation. But having ruled them out, the question is, how will Labour improve funding to public services? Or is it content with things as they are?

Why has the Labour Government in New Zealand taken this policy position? And is it right to do so?

It’s the economy stupid

It is very difficult for governments to be re-elected when the economy is doing badly. The world over incumbent governments have struggled at the ballot box against high inflation and people’s disposable income taking a hit.

Inflation in New Zealand has been lower than in other countries such as the United Kingdom. However, the challenge in New Zealand has been the cost of living was high prior to the recent bout of inflation. Added to this the wage stagnation since the 1980s, increasing prices make life difficult for people.

Given this, there is a real reluctance to rock the boat or embark on any form of radical reform. New Zealand left commentator Chris Trotter (who went to school with my late mother at Heregaunga College – yes New Zealand is a small country) has argued that New Zealanders historically have wanted stability and normality and this election is no exception. He quotes the current Prime Minister’s comment regarding transformation.

Prime Minister Chris Hipkins spoke no more than the truth this past week when he warned those berating Labour for failing to deliver the “transformation” promised by his predecessor, Jacinda Ardern, to be careful what they wished for. As he rightly pointed out, the government of David Lange and Roger Douglas really did transform New Zealand – and it’s the consequences of that transformation (inequality, poverty, homelessness) that are driving the present demands for a new transformation.

http://bowalleyroad.blogspot.com/2023/09/what-sort-of-election-is-this.html

There is undoubtedly a logic to what Chris Hipkins, backed by Chris Trotter claims above. Aside from the fact that in the 1980s Labour pushed new right reforms, against the very ethos and principles of the Labour Party, the speed with which these reforms were pushed through made for silly errors (e.g. selling assets for less than they were worth and sloppy legislation that lacked proper parliamentary scrutiny).

Voters may not be looking for massive social upheaval in the form of revolution or even radical reforms. But they expect the government to be addressing the social issues facing the country. Watch the leaders debate between Jacinda Ardern and Bill English in 2017. There can be no doubt that Jacinda promised the country that a Labour government would use every lever of government available to tackle the housing crisis, child poverty and poverty generally, low wages, and underfunding of mental health and the health system. Yet six years on, these problems continue and in some cases have gotten worse, in particular the housing market.

The government has had the excuse of the pandemic and then the cost of living crisis. However, it is worth noting that the first NZ Labour Government from 1935 to 1949 managed a massive programme of building social housing (state housing) during the Depression and through the Second World War. Things might be difficult, but it is still possible in the face of adversity to tackle the greatest social issues of the day.

Government responding to higher prices

One of the biggest challenges right now is the cost of living crisis. The government has come up with some reasonable responses to this. For example, increasing subsidies on Public Transport and a petrol tax exemption. Oddly, it decided to lift these subsidies weeks out from the General Election. If the thinking was that this would make them look like responsible managers of the economy, they needed to think again. A better move would have been to leave the subsidies on public transport and to delay ending the petrol tax exemption until mid-next year. As it is, people will now be paying more to get to work or drop their kids to school. This will drive up private debt and force more people into poverty.

The other recent announcement was a rehash of their 2011 policy of cutting the 15% Goods and Services Tax (GST) on fruit and vegetables. Whilst many both on the left and the right have been critical of this, there is merit in this policy. In the UK, there is no Value Added Tax (VAT) on fruit and vegetables, or in fact on most basic household items (bread, butter, etc.). Very few countries have the New Zealand model where sales tax is charged on absolutely everything. This is a regressive system that places the tax burden disproportionately on the poor.

The criticism of the GST off fruit and vegetables policy is that it will not make a significant difference to most households, especially with the transport subsidies ending. Another criticism is that it will reduce the take intake, placing public services at risk. This brings us back to the question, what level of public services do voters in New Zealand want? And how do they think this should be paid for?

The Tax Working Group

After forming a coalition with NZ First and the Green Parties in 2017, the Labour Government led by Jacinda Ardern established the Tax Working Group to investigate ways of reforming New Zealand’s taxation system and making it “fairer.” Some key areas under its purview included the Goods and Services Tax and alleviating the housing market.

In early 2019 this group reported back and recommended amongst other things In mid-February 2019, the Tax Working Group recommended that the New Zealand Government implement a Capital Gains Tax (CGT) and use the revenue generated to lower the personal tax rate and to target polluters. However, shortly after this Ardern announced that there would be no CGT while she was Prime Minister. This was a combination of pressure from NZ First, and polling showing public support was not strongly in favour of this.

Incidentally, the Bright-line rule is a form of capital gains tax, introduced by John Key’s National Government in 2015. Calls for a much broader capital gains tax have been loud from sections of the left for much of the last decade. Taxing capital gains is not the panacea many on the NZ left believe it to be. It is also not the only option to increase tax revenue, for example, things like a Financial Transaction Tax should also be explored.

What happened in 2019 was the debate on Capital Gains Tax was shut down. The recent discussion on wealth tax has now gone the same way. The two things Labour now need to consider are:

Are they still a party that stands for better funding for public services?

If so, how do they achieve this?

Other taxing questions

As already mentioned, NZ is unique in that it charges sales tax on absolutely everything. This is a very regressive form of taxation.

In some countries, the first $10,000 of income is tax-free, then is charged progressively. In New Zealand every single $ earned is taxable. In the UK, everything earned under £12,570 is not taxed, plus there is no VAT on most basic supermarket items. So while NZ has lower inflation than the UK, it punishes those on low incomes in other ways and has done so for decades.

On user pays NZ does not have a great record either. In the UK GP visits are free and have been since the NHS was established in 1948. In NZ GPs start charging when you turn 13. The current debate about free dentistry in NZ is important. Currently, dentistry is too expensive for many on low incomes.

There is a strong case for free dentistry across the lifecourse to improve overall population health. This may even help reduce the overall health spending in the long term. But there needs to be a decision by the voting public that there will be a tax regime to cover this service. The debate is starting in New Zealand, but until the tax question is resolved, progress will be frustratingly slow.

Tax, public services and the 2023 election

So of the two main parties National are proposing tax cuts but cannot explain how it will fund them. Labour, fear raising taxes will cost them swing voters, but not doing so is demotivating their base.

Minor parties are engaging in this debate, with both the Green and Maori Parties proposing wealth and other tax increases. On the right, the ACT Party is advocating over $1 billion in spending cuts. Whatever the issues with each of these party’s respective policies, they at least address the central issue that current tax levels are not sufficient to maintain quality public services. So the choice is to find ways to fund them, or as the ACT Party propose, give up and make people fend for themselves. That is the choice.

I rejoined the NZ Labour Party in 2013, after a few years of absence, and I will be voting for Labour again this year. If Labour does win a third term in office, the issue of tax and funding public services will need to be addressed.

16 comments on “Tax or quality public services – which is more important to NZ voters? ”

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  1. Ad 1
    28 September 2023 at 10:11 am

    This is the column we need to come back to after the election and Labour is seeking to rebuild its tax policy.

    It was really tough to see Robertson and Parker so actively shut down by Hipkins so late into the final year of the term. All of their work needs to come back onto the table.

    We also need to respect the strong correlation between Parker and Little's extension of the Bright Line Test and the collapse in house prices that has led to higher levels of affordability. Tax reform works.

    Also we need to respect the gradual effect of Labour eradicating many of the major advantages of holding assets in trusts. That's where most of the country's private wealth is stored. It needed at least an extra term to truly embed its effects.

    Also tax is not the only way the state earns income, so it's been great to see the Carbon Fund really take off, and major carbon reduction projects not having to draw on taxpayer funds.

    Increasingly we are seeing more dedicated (and independent of Ministerial direction) funds such as ACC and NZSuperFund and others take a stronger role in delivering infrastructure that would otherwise require tax funding. Similar to the fully hypothecated fuel fund for NZTA.

    The full policy field of funding state services needs opening up within Labour.

    • Dennis Frank 1.1
      28 September 2023 at 10:28 am

      Tax reform works.

      I'm inclined to agree, but depends how you sell it to the general public, which depends primarily on the framing you use to do that.

      Any future blend of leftists & centrists seeking credibility in a political party ought to choose the intelligent option: resilience + sustainability as framing, then a blend with current neoliberalism praxis as starting point for political strategy. Such a blend of now & then in political marketing provides pragmatic trajectory. Grounded, yet can fly.

      I'd recruit Rod Oram to lead the tax reform process, given his consistent street cred in environmental issues in recent years. Reckon he sees big picture. Probably need an experienced project manager to deliver in specified time frame given latent wowserism in academic experts, bureaucrats & aspiring finance ministers. I'm using that as an umbrella shorthand to cover the other usual deviant tendencies…

    • James Simpson 1.2
      28 September 2023 at 10:38 am

      In a perverse kind of a way, that may be a silver lining to the election loss.

      Major tax reform is not only needed, it is wanted by a strong majority of New Zealanders. We won’t see that reform under a Hipkins lead government.

      The loss of power and whatever leadership team arises in the new year should have this front and centre of their policy development over the next 3 years so that the next election will be fought with the left having a common tax position.

      • Dennis Frank 1.2.1
        28 September 2023 at 11:01 am

        Yeah, although it all depends on the size of the loss. Hipkins ain't the kinda dude can see the big picture. People like that always have to be shown, like Al Gore did to Helen Clark.

        Your idea that the left is capable of producing a common position is audacious, but truly a noble aspiration.

        • James Simpson 1.2.1.1
          28 September 2023 at 12:05 pm

          I don't think Parker and Robertson are too far away from the Green tax position. They are aligned on some form of wealth tax.

          However I don't see either of them sticking around for a term or 2 on the opposition benches so that is the challenge.

  2. Hunter Thompson II 2
    28 September 2023 at 10:32 am

    There is no guarantee that imposing tax will lead to quality public services. If the government is incompetent or corrupt, the money is wasted on vanity projects or goes to a secret Swiss bank account.

    However, I am forever grateful for living in a country with very little corruption and a fairly adequate health system, although cracks are starting to show and improvements must be made (according to Radio NZ, 28 Sept, many people aren't getting access to a GP or must travel a long way to get it).

    You noted the Tax Working Group report. In its interim report it did not back the idea of removing GST from food and drink. It makes me think Labour's proposal for no GST on fruit and vegetables is just politics.

  3. Patricia Bremner 3
    28 September 2023 at 10:56 am

    Thanks for this Nick. I think the idea of selling off so much housing to overseas folk is making some question a number of things into how to give tax cuts.

    1. Credibility. Most economists have rubbished the policy.
    2. The failure to produce modelling and the numbers is concerning and cynical.
    3. People are wary, as promises regarding tax have been changed after an election.(GST and Key)
    4. Most people know services were patchy unresponsive and neglected under Key to "balance the books"

    5 The opinions of the rating agencies and other large groups are favourable in regard to NZ's current management of crises and the economy.
    6. The Policy of selling high priced dwellings on the overseas markets will raise the price of all NZ dwellings.

    Further the rich selling to each other and using homes as AirBnBs means many properties are no longer in the ordinary Real estate market.

    Some states and Cities are limiting this private Air BnBs home market, as destructive to housing planning, and treat it as a commercial enterprise.

    It is to be hoped people vote for the realities rather than the fear and failure exaggeration, and a small tax cut sprat to catch the user pays mackeral promoted by Luxon and his backers.

    • Dennis Frank 3.1
      28 September 2023 at 11:06 am

      Good framing, that hexad. #6 is pure social darwinism. Gambling on more voters wanting to ride the escalator than strugglers trying to get on but can't & pissed off by the necessity/fate thing. A con proven to work well. Neolib mystique.

  4. Mike the Lefty 4
    28 September 2023 at 11:15 am

    We want both!

    You can't have both!

    Show me the money!

  5. Tricledrown 5
    28 September 2023 at 11:27 am

    Big Corporate power pushes the low tax propaganda constantly through their bought and paid for Media.There is no other option is their ideology.Low tax economies have higher unemployment higher inequality poorer education poorer heathcare poorer and more sporadic economic growth.The yoyo economies.like New Zealand 1990s the economy grew for only short periods of time after tax cuts 6 months out from every election then the economy declined after the sugar hit of tax cuts, except when Winston made National honour its promise of Tax cuts months after being elected while National wanted to hold back that cut till 6 months from the 1999 elections.

  6. That_guy 6
    28 September 2023 at 11:36 am

    Societies: like watches.

    You get what you pay for, and the cheap ones tend to break.

  7. Adrian 7
    28 September 2023 at 1:02 pm

    A wealth tax posited in the run up to an election is electoral suicide but while many may think its a good idea, pretty much everybody thinks they will be, or wants to be, wealthy to varying degrees and voting for a wealth tax can be seen as self-defeating.

    The brightline test of 10 years is a form of wealth tax, as is an excess profit tax which we certainly need. I'm in favour of these type of targeted taxes. One of the consequences of a wealth tax is that when outside pressures force up the cost of land and houses such as an influx of offshore buyers. A projected wealth tax of even 5% which the owner, in the case of a farm or such has to borrow money from banks to pay the tax as in a lot of instances the land has a limited carrying and profit value which far exceeds the inflated price, hence within 10 years it is well into negative equity and would need to be sold. To whom? The only buyers that could afford it are exactly the people we don't need here. The Thiels et al.

  8. Ed1 8
    28 September 2023 at 1:47 pm

    I find it bizarre that so many appear to believe that we do not have tax on capital gains. I believe we do, and that such a tax does apply to most investments, particularly those made by corporate entities, including Kiwisaver. If it is possible to tax realised capital gains on shares and fixed interest securities, and to offset against that taxable income, losses made from other sales of such assets. The exemption from capital gains tax on the sale of a home that has been the residence of the owner has apparently been done in such a way that it has been extended to investment in homes that are operated as a business. That distortion has led to New Zealanders preferring being a landlord to investment in shares – perhaps contributing to so many of our small companies being sold overseas as the entrepreneur seeks to finance retirement, and to so many of the larger companies in New Zealand being overseas owned. Why invest in the share market when there are tax free investments readily available? I am not a tax expert, so do respond if I have somehow missed something . . .

    • Brigitte 8.1
      28 September 2023 at 5:50 pm

      We don't have capital gains on shares. Tax only on dividends for NZ (and that's offset by imputation credits). Overseas shares are taxed on a "fair dividend rate" which essentially assumes that you earn 5% regardless of the actual return (it's a bit more detailed than that but not more than the 5%). Unless you are trading short term for profits in which case you will be taxed on the gains (which will actually be called income for tax purposes).

      • mikesh 8.1.1
        29 September 2023 at 12:12 am

        Some gains on share prices are likely to have come about as a result of retained earnings. These are not capital gains and income tax will already have been paid on these (or provision will have been made for payment of the tax at a future date), albeit at the company tax rate. If a capital gains tax were levied on share prices we would have to sort out how much of these gains will have been caused by this factor.

  9. No-Skates 9
    29 September 2023 at 1:46 pm

    the speed with which these reforms were pushed through made for silly errors (e.g. selling assets for less than they were worth and sloppy legislation that lacked proper parliamentary scrutiny).

    Selling assets cheap was great for them, as it was their mates buying. Lacking proper scrutiny was great, as they wouldn't have gotten past the scrutineers.

    We need to stop pretending these people are fools. It helps write off their selfish and callous acts as oopsie-daisies.