Curiouser and curiouser: Government u-turns on austerity measures and tax cuts

The government’s austerity measures are exactly what they ruled out in 2009. And so is their defence of cutting taxes in a fiscal hole. This tells us more about backroom dealings in the Beehive than about a good plan to get New Zealand back on track.

The government has signaled that it plans severe austerity measures for this year’s Budget. Those measures will likely cover almost every aspect of the government’s work – even health and education, which will have nominal funding increases, will come up short once you account for inflation and population growth.

One policy that looks set to be unaffected, however, is the Budget 2010 tax cuts, which gave New Zealand the lowest top tax rate and the smallest overall tax wedge in the high-income OECD.

Does this sound like the action of the government New Zealand elected in 2008? Not to me, it doesn’t.

The government has faced a fiscal crisis already, but with vastly different results.

Growth was very sluggish in 2009, leading the government to cancel the remainder of its 2008 package of tax cuts. But it left government spending mainly untouched. After all, that is what National had promised everybody in the election campaign. And in 2009 they were determined to keep that promise.

But now that we have the much larger 2010 tax cuts in place, the government’s response to an even deeper fiscal problem is the exact opposite. Tax cuts, previously first on the chopping block, are now sacrosanct; while government spending, once the sacred cow, faces the axe.

What changed?

Two obvious things changed, but they don’t help us explain the government’s 180 degree turn. First, the income tax cuts they are defending today are much larger than the ones they campaigned on in 2008 and dumped in 2009. Instead of a top rate of 37%, now it is 33%. And instead of a $6 billion four year package, now it is $14 billion.

Second, the need to find money got even stronger. In addition to very low GDP growth, which we faced in both 2009 and 2011, now we also have the cost of rebuilding Christchurch to find.

With a larger need for money, more generous tax cuts in place, larger demands on the social safety net, and a history of canceling tax cuts to pay for fiscal crises, it should have been obvious what this government would do, right? And it would have been even more obvious when you consider that New Zealand is one of the lightest taxers of incomes in the OECD, but it is not one of the heaviest spenders on social services.

But this week the government reversed itself entirely. The inconsistency between their 2009 position and their 2011 position is breathtaking. 

The answer to this riddle cannot be personnel, as it is basically the same team around the Cabinet table now as in 2009. It can’t be due to the increased influence of ACT (take a bow, David Garrett and Rodney Hide). And it can’t be because of the argument that tax cuts cause growth, which generates government revenue – that argument works just the same way in both years.

I think instead that we are seeing National jump ideologically to the right. More specifically, it looks like John Key is  losing influence over hard-line Ministers who want to cut government spending regardless of circumstance (and election promises), and is listening less and less to his more fiscally moderate colleagues, such as Simon Power. Mr Power’s resignation is another sign of this move; recent announcements on asset sales are a third.

National’s strategists appear to believe that their lead in the polls is now insurmountable, leading them to move from electorally-focused moderate policies to more ideologically-pure prescriptions.

We now are ruled by a government that, in difficult economic times, has delivered more than they campaigned on in terms of income tax cuts; targeted those tax cuts towards the highest income earners more than they had promised; and broken their promises to protect the social safety net and manage the cost of living.

In the last election there was a lot of discussion of trust. I wonder how far soft National voters will allow their trust to be stretched before it breaks.