Government faces death by a thousand cuts - Matthew Hooton

OPINION

You needn’t be a swivel-eyed neo-Marxist to doubt Christopher Luxon prioritising his $2.9 billion tax cut for landlords.

Luxon is right that Labour removing interest deductibility for businesses renting out existing homes created an anomaly compared with other businesses’ tax rules.

But Labour has a point in that allowing them interest deductibility but not ordinary owner-occupiers – at least those without complicated ownership structures – was anomalous too.

It’s a worthwhile debate. But, after 20 years of politicians tinkering with the tax system for electoral purposes, it’s not like this particular anomaly stands out for urgent reversal. Treasury says it won’t reduce rents.

Even if it does, it’s still eccentric for a landlord tax cut to be Luxon’s first big fiscal move, with his Government’s books now forecast to permanently spew red ink. Despite dropping the bizarre retrospective element of the tax cut, $2.9b is still a lot, about $800 million more than National budgeted pre-election.

To pay for it, spending ministers must find 145 cuts of $20m each, most carefully designed by bureaucrats to be maximally politically damaging.

Beehive strategists still insist their $14.6b of income tax threshold changes and middle-class handouts will happen from July 1, requiring spending ministers and their bureaucrats to find 730 additional $20m cuts.

Some should be easy. One chief executive has already reduced head-office staff by a quarter and aims for a third by mid-year.

But most refuse to offer more than the 6.5 to 7.5 per cent Luxon and Nicola Willis have sought. Worse, they’re coming in bibs and bobs – a million here, five million there – most designed to teach the Beehive a lesson.

Social Development Minister Louise Upston should regard her chief executive’s offer to save $70,000 of her $43b-a-year department’s $1.7b annual overhead by switching to instant coffee as not just unserious but smart-arsed.

Other mandarins are meeting targets simply by not replacing this year’s usual staff turnover. The slogan in Wellington is to “lean back” as the spending-cut bus rolls past, before business as usual returns in 2025.

The bureaucracy has no intention of allowing a mere Government to butcher it. To the contrary, it plans to kill the Government with death by a thousand cuts.

Luxon’s approach to finding savings might work in a corporate, but he couldn’t have designed a worse system for a bureaucracy.

I write from experience. When working for the education minister in the early 1990s, the Government broke its promise not to means-test student allowances. It saved hundreds of millions of dollars, real money back then, which helped slash the deficit, lower inflation and interest rates, and eventually balance the books.

While damaging, the fuss was manageable, and the Diplomatic Protection Service successfully dealt with the death threats.

What sucked up more of the Beehive’s time – including the Prime Minister’s – was a few million cut from the rural school-bus service.

We Wellington-based Beehive staffers didn’t even know about it, let alone how rural New Zealand would react.

Luxon’s admission he will break his surplus promises suggests belated acceptance there’s no chance of finding enough politically survivable spending cuts to fund $18b of tax cuts, plus extra spending promises, including restoring law and order and credible armed forces.

Who believes Mark Mitchell will let police officers earn less in real terms next year than under Labour in 2022, one top-brass proposal to deliver their spending cuts?

David Seymour is tasked with finding savings in the school lunch programme, now operating in 1000 schools, costing $323m a year and providing a daily lunch for 235,000 students, nearly 30 per cent of the total.

Bureaucrats say even more money is needed just to maintain the current service next year. Worse, school lunches were one of Grant Robertson’s notorious fiscal holes, with his last Budget suggesting Labour wouldn’t have funded them beyond 2024.

Seymour could go along with that to avoid adding over $1b to Willis’ four-year borrowing requirement. But even he seems too aware of the social and political consequences that – if Robertson’s numbers can be believed – Labour was happy with.

David Seymour is tasked with finding savings in the school lunch programme, which is costing $323m a year. Photo / Michael Craig

The $323m-plus cost seems extraordinary. The Beehive blames Jacinda Ardern and Chris Hipkins for trying to expand the programme eight-fold in 2020 and asking education officials to do it, not experts in the food and logistics industries with experience in the aged-care or hospitals sectors.

The more competent Seymour could cut costs well below $300m a year without reducing the number or nutritional quality of the lunches.

But that’s not how it would be portrayed.

Too many 20-something cub reporters in other media can’t comprehend that increasing funding for a government programme doesn’t necessarily improve the quality or quantity of the service, and nor does a cut necessarily reduce either.

They can be forgiven. Less forgivable is some political editors, senior bureaucrats, Labour, Green, Te Pāti Māori and most National MPs being no better. That’s how the Key-English and Ardern-Hipkins regimes borrowed $100b over 15 years with no obvious improvement in the quantity or quality of services.

Instead of wasting his time and political capital on even a $100m efficiency gain, Seymour might be better to let the lunches end. If he won’t, then given how much is being spent for under a third of students, he could go the other way and make them universal. For the benefit of Labour, Green, Te Pāti Māori and National MPs, if education officials are providing nutritious lunches to a third of students for a third of a billion a year, that doesn’t mean it would cost a full billion to do it for all.

Seymour might find experienced people in the food and logistics industries could do the whole country for little more than the current spend.

Act might worry what Friedrich Hayek would think. Yet, as one top Beehive strategist admits, they spend 20 minutes a day making lunches for their own kids each day, which often come home uneaten. It might be more efficient and boost productivity for that time in hundreds of thousands of households each day to be used for something else – working or helping with homework? – than making tens of thousands of uneaten sandwiches. Savings in supermarket bills would represent a middle-class tax cut for those with school-age children.

It makes fiscal sense for Seymour to abolish the programme. It could make economic sense to make it universal. What makes little sense is spending time and risking re-election extracting mere tens of millions from school lunches to fund just a tiny percentage of Luxon’s $18b tax cuts.

Seymour is needed for bigger jobs, with longer strings of zeroes, which will in fact improve the fiscal outlook, and so lower inflation and interest rates, and boost growth.

Matthew Hooton has more than 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties and the mayor of Auckland.