Week in Politics: Tax cuts and a spoonful of sugar

Analysis - Nicola Willis holds firm on tax cuts as critics warn they'll fuel inflation, Labour puts 'everything on the table' as it gets ready for its own tax policy reset, and the government hands out its 'first spoonful of sugar'.

It was hardly surprising that the government's Budget Policy Statement confirmed tax cuts would be delivered in the May Budget, given Finance Minister Nicola Willis had said she would resign if tax cuts were not delivered by the government.

However, it is still not clear exactly how they will be paid for. Willis talked about savings and revenue streams being sufficient but the devil is going to be in the detail.

She is going ahead despite the economic outlook being worse than forecast and in the face of critics urging her to wait.

"It is madness to pour cash back into the public's pocket until inflation is beaten and interest rates are on the way down," said Liam Dann, the Herald's business editor at large.

"Tax cuts are stimulatory - which means, in terms of the fiscal impulse, the government will be pushing back against its own austerity measures."

As RNZ reported, Willis has a very different view on that: "She said tax cuts would be funded entirely through reprioritised funding, savings, and new revenue, 'which means we won't have to borrow extra to provide tax relief and we won't be adding to inflationary pressure'."

Dann does not buy that. "There is no way pouring billions of dollars back into public pockets this year won't make the Reserve Bank's job harder."

Fran O'Sullivan, NZME's head of business, said there was a dawning reality that the government's books needed to be knocked into shape "before they dish out a programme of inflationary tax cuts".

The tax cuts would be a sugar hit for households and they would spend more. "The very real risk is that inflation simply stays high," O'Sullivan said.

"The Reserve Bank keeps the pressure on and it will take a good deal more time to climb out of the current economic slump."

1News reminded its viewers that a Verian poll in September found more people opposed the policy than supported it, and said the International Monetary Fund (IMF) had cautioned the government against spending on tax cuts.

None of that will make any difference. Willis continues with her mantra of "putting money back into the pockets of hard-working Kiwis" and they are going to get it whether they want it or not.

Hipkins changes his tune on capital gains, wealth taxes

Labour appears to be ready to bite the bullet and start working on a tax policy that could include a wealth tax, a capital gains tax, or both.

Party leader Chris Hipkins, who said before the election no such taxes would be introduced by a government he led, has changed his mind.

Hipkins said that was about the current term of Parliament - if he had been leading the government - not about the next one.

So everything is back on the table and some strong hints have been dropped about what could be picked up.

In his State of the Nation speech this week Hipkins described the current tax system as inequitable and unsustainable.

"Those who earn their living through their salary and wages are contributing a greater share than those who earn income through wealth," he said.

"Under this government, those with multiple investment properties are getting huge tax breaks while those on salary and wages pay tax on every dollar they earn."

Hipkins explained his position in detail on Morning Report, and the website article is headed 'That was then and this is now'.

Former finance minister Grant Robertson also spoke about the need for fairness in the tax system in his valedictory speech last week.

That sounds very much like a pitch for a wealth and/or a capital gains tax, which Labour could have put it in front of voters at the last election if Hipkins had not lost his nerve.

Will he have the nerve next time? Political commentator Bryce Edwards wondered about that in an article headed 'Is Chris Hipkins to be trusted on tax reform?'

"Former finance minister Grant Robertson and former prime minister Chris Hipkins have been conveying how unhappy they are with the tax system," Edwards said.

"It really is beyond parody that such senior members of the last government are suddenly condemning the current tax system as grossly unfair only after they're out of power."

Edwards said many on the political left were aghast that Robertson and Hipkins had six years, including three years with a historic majority, to push through any radical tax reform they wanted, but were only now talking radically.

He thought Labour's big problem was that to build a campaign for progressive tax change it needed a leader with strong credibility on debating reform.

"Does Hipkins have that credibility? Can he and Labour be trusted on tax?" he asked.

"His (Hipkins) various u-turns on tax don't come across as authentic, but instead as opportunistic. This is a huge problem for Labour."

It will be well remembered that it was Hipkins who scrapped the work that Robertson and former revenue minister David Parker were doing on tax reform when he made his "captain's call" in July last year.

"I'm confirming today that under a government I lead there will be no wealth or capital gains tax after the election," he said.

Hipkins gave as his reason that he wanted to give voters "certainty and continuity" while he "focused on the basics".

Treasury documents had revealed officials worked on a "tax switch" package that would have delivered a tax free zone on the first $10,000 of income, funded by a 1.5 percent tax on the value of individuals' assets above $5 million.

The fallout from Hipkins' decision was that Labour's poll ratings fell even further and Parker resigned the revenue portfolio.

While Hipkins talked about giving certainty and continuity, a more likely reason was that he was not willing to take on National, and Willis in particular, for the rest of the election campaign.

He would have had to counter rampant claims that Labour was a "tax and spend" party that would tax everything it could get its hands on.

Labour will face the same challenge next election, but it has more than two years to work out a tax plan and communicate it to voters in ways that survive a National Party onslaught.

After all, there is no doubt the tax system is unfair. That was demonstrated by IRD in its investigation report published in April last year which showed the effective tax rate paid by New Zealand's richest people was 8.9 percent compared with 22 percent for someone earning $80,000.

Parker said at the time it was ground-breaking research.

"We have known that some of the wealthiest New Zealanders don't pay tax on some of their income, but we have not known how much, nor their effective tax rate overall," he said.

"Our citizens like tradies, nurses, school teachers, hospitality workers, hairdressers, cleaners, engineers and small business owners all pay a much higher effective tax rate than their wealthier fellow Kiwis."

Parker, unlike Robertson, is still in Parliament. Surely he and his colleagues can put up a case for a wealth tax that will not be torn to pieces by the centre-right.

Inequality expert Max Rashbrooke thinks the public is ready to be convinced about the need for a capital gains tax, RNZ reported.

He said Labour had done a lot of work on a fairer tax system and would be feeling the pressure to deliver on it.

"I don't think Hipkins would raise his head above the parapet if there was no intention to do anything because why would you get everybody's hopes up again and dash them for a second time," he said.

"This call for a debate about the taxation of wealth and income from wealth has to lead to something, otherwise it's going to do extraordinary damage to the Labour Party and its support."

Rashbrooke said a capital gains tax would be the easiest idea to take to the public, and he thought people were ready for it.

"We are virtually the only country that doesn't tax capital gains in some meaningful way," he said.

"There's a very easy rationale for them; income is income and we should treat the income that people make from selling assets the same as we treat the income from my freelancing career or someone else's salary."

Rashbrooke said Labour had never been able to mount a sustained, coherent pitch in favour of any major change of the tax system.

"Until they figure out how to do that the debate isn't going to take us particularly far."

Announcement of childcare refunds a political sweetener

The government, after weeks of repealing legislation and cutting costs, this week delivered what Stuff's political editor Luke Malpass called "its first spoonful of sugar".

It was, he said, the "real start of its much vaunted cost of living relief ... the first move ahead of the May Budget of the government actually doling out some cash".

It certainly needed something to help the medicine go down, and the announcement of significant help for families paying for childcare was a difficult one for the opposition to criticise.

Prime Minister Christopher Luxon and Willis - who has had her share of prime time publicity this week - made a joint appearance.

Families would be eligible for childcare refunds of up to $75 a week, starting from 1 July, they said.

It would be paid every three months after invoices had been submitted to IRD.

Payments for those earning between $140,000 and $180,000 would be gradually reduced.

All the details are in RNZ's report on the announcement.

* Peter Wilson is a life member of Parliament's press gallery, 22 years as NZPA's political editor and seven as parliamentary bureau chief for NZ Newswire.