Labor hopes National chokes on Robertson’s poison pill for income tax

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Luke Malpass is Stuff’s political editor.

OPINION: The government accounts this week was good news for government and a reminder of the political cunning of Finance Minister Grant Robertson.

The country still has a budget deficit of nearly $10 billion, but that’s half of what was projected in the May budget. Net debt is also relatively low at 17%, although it uses a new measure that includes the New Zealand Super Fund.

This follows a trend we have seen throughout Covid-19 where major economic effects have not been on the government books. Clearly, the costs of wage subsidies and other Covid stimulus programs have bottomed out, but government receipts have risen and spending has been a little lower than expected – albeit at high levels . Core Crown spending remains $17 billion higher than in 2020 and 2021. Inflation is doing its job.

This was also reinforced by the news that lamb prices ended the year at record highs.

Finance Minister Grant Robertson during the year-end count at the Treasury on Wednesday.

ROBERT KITCHIN/Stuff

Finance Minister Grant Robertson during the year-end count at the Treasury on Wednesday.

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Overall, this was good news for Grant Robertson. Well, almost.

Better than expected books leave more room for government spending, but also for other measures such as that the tax cuts proposed by the National Party. ACT is also proposing tax cuts, but National’s would be the most likely to see the light of day if the government changes next year.

The books also give more relief to the labor movement to go after new cost-of-living wage demands to fight inflation. Since inflation is over 7%, demands are importantand not without reason.

So while Robertson constantly talks about the National Party’s so-called Bermuda Triangle (the fact that he can’t cut taxes responsibly without increasing debt or cutting spending), he may well be facing his own triangle between managing a non-inflationary budget, wage hikes and strikes.

Further industrial action early next year is now on the agenda as teachers, nurses and many others see their real living standards drop.

However, Robertson is now playing a card that – being a strategic political thinker – he appeared in the pack in the 2020 election.

Earlier he announced that Labor would restore the 39 per cent tax rate last seen under Labor when Sir Michael Cullen was finance minister. However, this would only affect income above $180,000, so every dollar earned above that level would now incur 6 cents more in tax. At the time, it was expected that it would only apply to 2% of employees.

Robertson’s reasons were quite vague, framed in terms of fairness and everyone doing their part after the 2020 shutdowns and with borders still closed.

“Our plan finds balance as we recover from Covid-19. This will avoid the service cuts suggested by the National Party and will also help contain debt as we support economic recovery from a 1 in 100 year shock,” he said at the time.

As if proving his political radar right, many on the political left were furious that the changes had seemed tokenistic and hadn’t raised taxes on enough high-income people.

In this case, the tax is expected to bring in about an additional $600 million per year. A reasonable amount of money, but zero in the larger framework of government spending.

According to Wednesday’s accounts, over the past year the government has spent $151 billion and generated more than $141 billion in revenue, including $107 billion from taxes and $17.4 billion from GST. This makes the 39% tax rate responsible for about 0.4% of the government’s annual revenue.

His overthrow would not result in massive cuts.

National Deputy Chief Nicola Willis and Chief Christopher Luxon have pledged to reverse the 39% tax rate - but prefer not to talk too much about it, writes Luke Malpass.

ROBERT KITCHIN/Stuff

National Deputy Chief Nicola Willis and Chief Christopher Luxon have pledged to reverse the 39% tax rate – but prefer not to talk too much about it, writes Luke Malpass.

But the real political goal of the tax change at the time seemed to be to introduce a little poison pill into the tax system that National would have to swallow in a subsequent election.

At the time, National argued that this policy would increase the complexity of the system and was likely to lead to tax avoidance – which Labor quickly tried to ensure was not the case, somehow proving the interest in doing so. One of the virtues of the old system was that the top tax rates were more or less aligned, leaving no incentive for resources to invest in legal tax avoidance activities.

Either way, National continued to pledge to cancel the 39% tax rate – part of a wider pledge to undo virtually all of Labour’s tax hikes. This is now the area Robertson has honed in on. See, he says, cutting taxes on the wealthiest is really National’s priority.

He and the Labor members will continue to use it to hit National for the year ahead. National, however, isn’t too worried yet — party figures believe that whenever Robertson talks about it, people just hear tax cuts and National in the same sentence. Ergo, good for National.

A bit of rhetorical ballast was added to Robertson’s argument last week as British Prime Minister Liz Truss turned Thatcherite and promised to cut the UK’s top tax rate, but did not. couldn’t really find a way to pay for it in a high inflation environment. The pound then fell as markets were skeptical about how the Tories would hoard public finances or rein in inflation as a result.

New Zealand is in a different situation, but it is not politically easier for National. The current government or a future national government certainly has fiscal space to cut taxes responsibly. But that will either require cuts elsewhere or more short-term debt so as not to be inflationary.

The election will ultimately show where the public stands with this particular compromise.

But Robertson’s and Labor’s continued attacks on National’s 39% position are clearly working to some extent. National seems reluctant to talk too much about this tax cut and instead focuses on its indexation policy, which would effectively take income tax adjustments out of the hands of politicians and prevent inflation from tipping people into new higher tax brackets.

There will be many demands on the government’s books over the coming year and, in a speech a few weeks ago, Robertson gave a coded warning to his colleagues not to wait for more money.

That the books are in better condition than expected is a good result for New Zealanders. But balancing the politics of wage demands, election-year spending pressures and the continued need to reduce inflation will see Robertson’s hands busy in the year ahead.

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