- 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: capital gains tax, chris trotter, green party, GST, Labour Party, Quality Public Services, tax
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.
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.