Election 2023: Hole in Christopher Luxon’s tax bucket - Mike Munro

OPINION

There’s a hole in your tax bucket, dear Christopher, a hole.

And with what shall you mend it?

The remedy so far has been to try and swagger the problem away.

Christopher Luxon relies on a “trust me” strategy, which sees him blustering about National’s tax numbers being robust and rock solid while insisting that he and Nicola Willis know what they’re doing.

He went as far as asserting during one media encounter this week: “I’ve given you what you need to see.”

Except that he hasn’t, not by any stretch of the imagination. And that serves to highlight his credibility problem.

Some initial analysis – based on setting aside Chinese buyers – suggested that the foreign buyers’ tax has a $1 billion hole.

Then a group of economists from across the political spectrum got their calculators out and concluded it might actually be twice that.

Whatever the number – $1b, $2b or somewhere north of that – the upshot is that the foundations of the edifice known as National’s Back Pocket Boost are beginning to crumble.

The party is heroically claiming that the numbers in this week’s Prefu, Treasury’s Pre-election Economic and Fiscal Update, do not make the funding of $15b worth of tax cuts over four years any more difficult.

It’s like they haven’t noticed how tight the finances are.

For National is counting on being able to fund tax relief separately, that is, separate to the operating allowance, which is the money governments set aside to pay for any new policies or meet cost pressures in the years ahead.

So they say they’ll find the money for tax cuts by slashing $600 million off public-sector back-office functions, $400m from the Government’s consultancy spend, raiding the Climate Emergency Response Fund that taxes polluters, and introducing four new taxes.

But if that’s not enough to foot the tax relief bill, and it won’t be, then they would inevitably have to dip into the already-squeezed operating allowance.

Of the four proposed taxes, it’s the 15 per cent foreign buyer tax on homes worth $2m or more that is the main driver of National’s festering credibility problem.

It’s worth taking a minute to absorb the numbers.

National’s claim that $740m a year can be raised by taxing foreigners buying homes in New Zealand assumes that Chinese buyers will be included. But the problem is that the double taxation agreement between New Zealand and China probably nullifies that assumption, as even Sir John Key has pointed out.

Chinese buyers made up one-third of foreign buyers before the 2018 ban on foreigners purchasing houses here, a ban which National promises to overturn.

Take Chinese buyers out of the tax plan and it follows that one-third of the projected income vanishes, leaving National’s revenue-raising plans with a $250m-a-year shortfall.

Whatever the number – $1b, $2b or somewhere north of that – there's a hole in National's foreign buyers’ tax. Photo / Fiona Goodall

This means the hoped-for tax take of $3b from foreign buyers over the forecast period therefore needs to be revised downwards to $2b – hence the $1b hole scenario.

And then separately, there’s the modelling undertaken by a trio of number-crunchers, including former Reserve Bank economist Michael Reddell.

Using price and sales data from real estate experts CoreLogic, and excluding Australian and Singaporean buyers who wouldn’t be covered by the proposed tax, they calculated that National’s revenue projections fall short by about $530m a year, or $2.12b over the forecast period. The higher-end estimate left a shortfall of $450m a year.

As Reddell says, if the numbers are as robust as National claims, it shouldn’t be a problem to release the assumptions that underpin them.

But Luxon and Willis continue to dig a hole for themselves by refusing to do so.

If Luxon had been this obtuse while at the helm of Air New Zealand, his shareholders wouldn’t have tolerated it. A company chief executive wouldn’t issue a major new policy and tell shareholders, “trust me, I’ll make it work”. By the same token, taxpayers shouldn’t be treated so dismissively by someone aspiring to be prime minister.

Alongside the flawed modelling, there is also the more fundamental question of the wisdom of across-the-board tax cuts given the prevailing economic conditions.

While, in overall terms, the Prefu painted a reasonably stable economic picture, Treasury did warn they expect the deteriorating tax take to persist. This will lead to weaker fiscal results across the forecast period.

Elsewhere in the world there is a realisation this isn’t the time for tax cuts that will fuel inflation and lead to cuts in public services.

The UK government, for instance, has declined to reduce taxes for fear of stoking inflation and so forcing it to make sweeping spending cuts. The Biden administration has similarly made it clear that any tax relief for low-income households would have to be offset by higher taxes for wealthy Americans and corporations.

Even Luxon’s likely partner in a centre-right government, Act leader David Seymour, has misgivings about immediate tax relief now the forecast deficit is nearly $4b higher than was predicted in the May Budget.

Luxon, in his trademark cocksure fashion, doesn’t see a problem. He rubbishes any suggestion that the cuts are fiscally irresponsible, and keeps repeating that National is comfortable with its policy and its costings.

Government warnings that National’s tax plan will fuel inflation are airily dismissed. As is Grant Robertson. The economy might be 7 per cent larger than pre-pandemic, debt levels among the world’s lowest, surpluses set to return in 2026/27, and wage growth forecast to outpace declining inflation, yet he’s “one of the worst finance ministers in our history”, sneers Luxon.

It takes a lot of hubris for a first-term MP to say that.

Mike Munro is a former chief of staff for Jacinda Ardern and was chief press secretary for Helen Clark.