Mixed signals as confidence slips

John Key and Bill English are sending out mixed signals about the next government budget while public confidence in New Zealand’s economic recovery wanes. Why?

The TVNZ Colmar Brunton poll tells us that public confidence in New Zealand’s economic recovery is slipping. Last November, 68% of respondents were optimistic about our economic prospects. This month, 59% of us are optimists, and 41% think things will stay as they are, or get worse.

My belief – without any poll data to back it – is the root cause of the slippage is that people are getting pretty confused about their government’s intentions for its crucial mid-term budget.

We have been inundated with a plethora of reports – from the 2025 Taskforce, the Tax Working Group, the Capital Market Development Taskforce – all containing long wish lists. But trying to distill what the government is actually going to do about their recommendations is no easy task.

The dynamic duo leading the budget process have talked about major tax changes – a package to restrain consumption and boost production; alignment of the income, company, and family trust rates to remove the incentive to crawl into tax shelter; an increase in GST, offset by some kind of compensation package to households that would be hard-pressed by the consequent increase in the cost of living - and the aspirational goal of closing the income gap between New Zealand and Australia.

Just when you start to get a handle on where you think the government is going, the game changes.

Track John Key and Bill English on the GST-offset-by-compensation proposal. One day, the prime minister assures a television interviewer that “no-one” will be worse off. Then, he says “the vast bulk of people” won’t be adversely affected. Then, Bill chimes in with “most people” won’t be affected.

Try working through the complexities of compensation. Presumably, the scale of the GST compensation package will be influenced by official forecasts of the impact that a GST increase up to a maximum of 15% will have on prices, interest rates and unemployment. That data is yet to come to the Minister of Finance, he told me last Friday.

The Government Statistician says lifting GST from 12.5% to 15% will increase the retail price of goods and services subject to GST by 2.22%. The move will pump up the Consumer Price Index by around 2% because 9% of the goods and services in the CPI measurement basket are not subject to GST – household rentals, school donations, and credit services. I suspect he is wrong.

When Labour last increased GST from 10% to 12.5% in 1989, food prices suddenly jumped by 3.8% in the month the tax rise occurred. Then, there is the problem that every New Zealand household does not buy the CPI basket of goods and services every week – so how do you compensate for the variations? And who says landlords, schools and creditor providers are not going to have increased costs to recover after GST goes up?

It is easy to talk about compensation – but it will be fiendishly difficult to design a scheme that ensures either no-one, the vast bulk or most people will not be adversely affected. And what really is the point of broadening the tax base with a change that does nothing to reduce the government’s ballooning deficit, or, if it does, then suppresses demand when you are trying to promote growth and bring unemployment back from levels that are already running ahead of forecast?

Next challenge: work out what the prime minister means when he says there will be personal tax changes “across the board”. I am pretty sure that John Key is not proposing income tax increases across the board or for any specific group– but I am none the wiser for asking Bill English if it means there will be tax reductions for every income bracket. That decision has still to be made.

Now: alignment of the income, company and family trust rates. That sounds like a great idea. We were told it would take away the higher earners’ incentive to shelter income by splitting it advantageously across the spectrum. But here comes Bill, with another bucket of cold water.

Complete alignment may not be necessary, he revealed in Palmerston North last week. “Substantial gains could be made by aligning the top personal tax rate and the trustee tax rate… and having a company tax rate not too far below this.” But here’s the rub: New Zealand’s company tax rate [at 30%] is on the high side compared with many other developed nations – and around the world they are generally falling. Remaining competitive may be more important than alignment.

Bang goes another great idea: the creation of effective corporate tax shelters may replace wealth creation [and employment creation] as the purpose of company formation.

Finally, set aside the confusion. Have you ever seen as much pre-budget signaling from any other government in your lifetime? There are so many options and possibilities on the table that I’m paralysed by the choice. Perhaps the government feels the same way.

The most charitable interpretation I can put on it all is this: the Key government has to be out there polling like crazy to find out which mix of the medicine the people are prepared to swallow. The only way they can hold their coalition together on the treasury benches is by producing some convincing evidence that where they lead, the mass of voters will follow. Snake oil vendors had it much easier. They could always leave town.