Fran O'Sullivan: Key's faux pas looking like Freudian slip

John Key's celebrated faux pas at his first National Party conference as leader ("Under a Labour Government I lead ... ) was portrayed as simply an inadvertent slip born out of nervousness.

But after Key's outright panning of the Don Brash-led 2025 Taskforce report his 2007 slip-up is starting to look almost Freudian.

His Government has appointed several taskforces to examine crucial issues facing New Zealand: The Don Brash-led taskforce which is tasked with finding ways to bridge the income gap with Australia by 2025 and the two working groups tasked with making our taxation system and capital markets more competitive.

The Brash taskforce inevitably pinged out-of-control Government spending as the behemoth which must quickly be slaughtered so that competitive tax rates can be introduced to give incentive for businesses, entrepreneurs and wage and salary earners to invest here and strive hard to build a successful future.

This is a no-brainer.

Core Government spending has exploded by 45 per cent since 2005 - a level which Finance Minister Bill English says is unsustainable.

Brash and his four taskforce cohorts: former Labour Finance Minister David Caygill, Wellington economist Bryce Wilkinson, Icebreaker CEO Jeremy Moon and Australian Productivity Commission part-time member Judith Sloan, were deliberately cute in delivering Key and English a ready rationale for cutting spending back to 29 per cent of GDP.

This after all was the level of core Government expenditure registered in 2004-2005 before former Finance Minister Michael Cullen opened the floodgates on social spending.

All it required was for Key and English to start taking the axe to some of Labour's sacred cows, urgently review some major spending programmes, and get serious about setting measurable goals to turn this economy around.

No one is underestimating the political difficulties in making such substantial change. But unless substantial change is made, New Zealand will not catch Australia. Ever.

A factor which English seemed to concede yesterday by saying the 2025 goal was merely "aspirational".

Problem is the top Government duo reckons its options are constrained because they don't want to break National's 2008 election pledge to keep Labour's own big-ticket election bribes such as interest-free student loans and the expansion of Working for Families which Key had demonised as "communism by stealth"(before the 2005 election).

This is surreal.

All National has/had to do was cite the untenable amount of debt which the Government had to take on board to sustain the fiscal stimulus package, and the fact that Cullen had stripped the cupboard bare in advance of the last election as the economy slipped into a deep contraction.

Any politician worth their salt could execute a believable volte-face in such circumstances.

But instead of scuttling Labour's big-ticket policies, Key scuttled National's second round of tax cuts. And instead of scuttling Labour's big-ticket policies, Key is reneging on his own stated ambition to catch up with Australia.

Now the Prime Minister is pouring cold water from afar over the 2025 recommendations almost as if he was indifferent to the fact his Government is having to borrow a quarter of a billion dollars a week to prop up our living standards in the wake of the global financial crisis.

English knows this galloping debt is unsustainable and is preparing to reduce Government spending in his next Budget.

But like Key he is keeping to the "we must keep our promises" (at all costs) mantra.

Yesterday, English again reaffirmed the Government would not respond in a radical fashion to either the 2025 Taskforce or the taxation working group's suggestions.

He said rising tax rates in countries hit by the global recession gave New Zealand a rare opportunity to position itself as a relatively lowly taxed country without pursuing the radical tax-rate cuts outlined in the Brash taskforce report.

English maintains New Zealand has a unique opportunity to improve its relative position.

"We have come out of this recession in sufficiently good shape to have some choices beyond surviving and keeping our credit rating. Countries that had banking collapses will all be putting taxes up and they will have to remain high for some time," he told journalists yesterday.

The Government's long-term aim is to align company, personal, and trust tax rates at 30 per cent.

The working group is expected to recommend that New Zealand's top income tax rate be reduced to 30 per cent from 38 per cent, aligning it with the company rate. The estimated $1.6 billion annual cost could be made up by increasing the sales tax, and imposing a land tax or levies on capital gains from investment property.

English stressed yesterday that the tax system was unable to meet future revenue needs in its present form so any reforms would be fiscally neutral.

"We don't want to be collecting any more tax revenue than we are at the moment ... . if we want to lower ]tax rates] in one place, we would have to raise them in another."

Ironically, it looks as if New Zealand will not get radical change on the taxation front unless Australia moves first.

Australian Treasury Secretary Ken Henry's review of the Australian taxation system is due to report soon.

English takes the view that New Zealand competes directly with Australia. A New Zealand response could be required relatively swiftly if Australia made significant changes to its tax system that advantage Australian people or businesses over New Zealand.

This highly reactive approach is not going to set Kiwi business alight.

It's fast getting to the point of saying if New Zealand wants to catch up with Australia it should get rid of the political middlemen and just apply to join the federation.