Liam Dann: CGT backdown will deliver timely business boost

The lifting of the CGT threat removes at least one layer of the gloom weighing on business. Photo / Getty Images

COMMENT:

Relief the business and investment community is now feeling at the demise of the capital gains tax threat could translate into a well timed confidence boost for the economy.

In theory the Government decision to rule out any form of capital gains tax is a simply a retention of the status quo.

But in practice the prospect of a complex and potentially costly tax change has been one of several policy uncertainties weighing on business confidence this year.

The decision to rule it out completely came a surprise - even to tax experts sceptical about the complexities the change may have created.

"We thought, at a absolute minimum, we'd see residential investment property brought into the net, with commercial property potentially as the next step," said EY NZ tax policy leader David Snell.

There is sense in which the Government has, perhaps unwittingly, engineered the kind of artificial crisis and resolution employed by US President Donald Trump with his market moving trade wars.

The already buoyant NZX-50 sharemarket index surged through to a new record shortly after the PM's announcement at 2pm today.

Meanwhile another fresh piece of important economic data provided a timely reminder of the economic headwinds the Government faces if New Zealand follows the international trend towards slower growth.

First quarter inflation data came in lower than expected pushing the Kiwi dollar down as traders bet that a Reserve Bank rate cut is now more likely.

In the sense that there is now one less thing for business to worry about, the timing of this announcement is pretty good.

But the prospect of warming relations with business will be small comfort to Labour's senior leadership team.

They had hoped, at a minimum, to deliver the Tax Working Group's "minority report", toughening of existing tax rules on property investment.

There can be no doubt that it was Winston Peters and NZ First that killed the CGT beast.

Increasingly NZ First is playing the role of center-right hand brake on a Government which would otherwise be in a position to use its political capital for more radical change.

NZ First has also been instrumental in softening aspects of employment law reform that business groups found least palatable.

There are more battles looming between business and this Government around employment law. Business groups will now look to Peters with some hope.

But on other issues bugging business - skills shortages, immigration and foreign investment rules - NZ first will be less accommodating.

Regardless, with a keen eye on the polls and the public mood, Peters has decided to hang tough on the CGT issue.

Whether that reaps him the appropriate political rewards from the National Party supporting leaning business and investor community remains to be seen.

As the Prime Minister said: that's MMP and coalition politics.