National needs a Capital Gains Tax - it's still borrowing to pay for tax cuts

The deficit-funded tax cuts that National gave the high income earners is still being paid for by borrowing.

When National won office at the end of 2008, they had a mandate to give median income earners a tax cut 'north of $50 a week'. At the time John Key made that promise he explicitly pledged not to increase GST to pay for it.  

"National is not going to be raising GST," he fibbed. "What I am saying is if we do a half-decent job as a government at growing our economy I am confident that won't be happening."

Heh. "Half-decent."

Anyway, what happened next: National used the GST as cover for its 'tax switch', and the GST increase more or less wiped out the income tax cuts for median income earners. But top earners ended up miles ahead, at a time when the government was borrowing billions.

The Government said the GST 'tax switch' would be fiscally neutral. It cost around $1.5 billion in the first year alone. Now the government is having trouble meeting its number one economic target of getting the books back into order.

Yet the awkwardness of a continuing deficit coms at the same time when they are also claiming 'rock star' status for the economy, which is the new name for the top of the economic cycle ( as if a slow down from here were not as inevitable as a sunset following noon.)

This is the time in the cycle when tax revenues are maximised and spending on unemployment is at its lowest. If they can't get the books into surplus now, the deficit is going to be back in the multi-billions when growth slows. 

On the numbers the prime minister himself is using, government spending has declined as a proportion of GDP from 36% when he took office to 30% today. Spending isn't the problem (Even though I'm a critic of some of National's spending, such as handouts to Sky City casino and Team NZ, those are a matter of the wrong priority, and tiny components of the deficit anyway.)

The problem is revenue. 

The Government's income isn't paying the bills, not because its bills are too high but because its income is too low. 

Bill English has never run a surplus - in his term as finance minister before Michael Cullen was in office, nor in his two terms since. In between, Michael Cullen ran nine in a row. 

This wasn't just luck - Sir Michael would never have borrowed to cut tax on the highest incomes. National borrowed so much it can't make ends meet even when it is claiming the economy is going gangbusters.

Now the Reserve Bank has given National a way to cover its blushes, calling for a capital gains tax. 

They should introduce an income tax-capital gains tax 'switch' - a fiscally neutral tax cut on middle incomes paid for by offsetting tax on capital income. They have already borrowed to cut income taxes. Now they need to fill the fiscal hole they have dug.