Steven Joyce: The case for tax cuts - let’s give Kiwis some hope

Kiwis have been squeezed and are voting with their feet - we need to give them a reason to stay in New Zealand. Picture / Sylvie Whinray

OPINION

If you believe most of the commentariat, and apparently a majority of economists, the Government’s much-signalled and much-promised tax cuts are a very bad thing. Yet according to a Taxpayers’ Union poll, 74 per cent of New Zealanders surveyed want tax thresholds adjusted for inflation. In other words, a tax cut. How has the public managed to get so out of step with the thought leaders in our society?

I’m no unalloyed fan of the Taxpayers’ Union. It used to take more than occasional potshots at me when I was a Cabinet minister, casting me as a spendthrift adrift on a sea of profligacy. Of course, that was before it met the most recent Labour Government, but I digress. It does seem to have cottoned on to something which has eluded many people. And that is, members of the New Zealand public are roundly sick of being fleeced by their Government.

You don’t have to look too hard to see why. The 17.5c in the dollar tax rate has cut in at $14,000 of income and the 30c rate at $48,000 since 2010. Meanwhile, rampant inflation has driven people up the nominal wage scale so they have ended up paying ever more of their wages to the taxman.

Losing 30c in the dollar or even 33 cents (the rate at just $70,000) gets tedious pretty quickly, particularly when you lose a further 15c in GST when you actually buy something. Between cost increases and this stealthy increase in taxation known as fiscal drag, the much-discussed middle-income New Zealander has been well and truly squeezed.

The last meaningful tax change was legislated by yours truly in the Bill English Government in 2017, only to be reversed by Labour when it was installed in Government in November of that year. Unsurprisingly, it has never been a good time to adjust tax rates in the six years since, just as it wasn’t in the nine years of the earlier Clark/Cullen Government.

The Government has grown massively. Core government expenditure represented 28 per cent of our economy in 2017, rising to more than 34 per cent in 2022. Despite the end of the Covid age, it is not much less than that now. Sadly, as we all know, that increase in the size of the Government hasn’t been matched by a commensurate improvement in public services.

Measured against that backstory, the arguments that taxes shouldn’t be cut now seem pretty flimsy.

There are those who look at the state of our public services and the long line of publicly funded groups very publicly arguing for more money and say that should be the priority. Only it has been the priority for the past six years and public services for the most part have gotten worse over that time. A focus on value for money and performance would likely yield far more improvements in most cases than ever more money.

There is another group - I’m looking at you, sundry economists and fellow-travelling economic commentators - who say tax cuts would be inflationary. And indeed they could be if they increased the rate of government borrowing through what is known as the fiscal impulse. However, nobody expects the Government will continue to increase government borrowing at the record-breaking rate Grant Robertson managed over the past six years. It is instead bound to shrink, so that is largely a non-starter.

The bigger danger is probably on the downside. I’d wager the Reserve Bank governor is at risk of going too large for too long on the inflationary slowdown in a mirror image of the way the bank overdid the economic stimulus during Covid, but this time underestimating the impact of the current, entirely necessary, cut back in government spending. If there is to be a boost in consumer spending as a result of the upcoming tax cuts, it may turn out to be very timely for the wider economy.

And so to the positive side of tax cuts. As well as easing some of the cost-of-living pressures on Kiwi households, there are the wider economic and societal benefits of reducing taxation on wage and salary earners, as well as New Zealand’s army of small businesses.

That argument goes a little like this: If we are to lift ourselves out of our economic doldrums, we will have to grow our way out. And that will only happen if we rebalance our economy in favour of rewarding effort rather than redistribution. We need the people with get up and go to work harder and smarter and to earn more in real terms for doing so.

To achieve economic growth, we need to increase the rewards for working an hour, for investing another dollar or hiring another worker. We won’t do that by simply declaring higher nominal wage rates for everyone which are eaten up by inflation, or by slugging people with higher and higher marginal tax rates. We do it by letting them keep more of the money they earn.

It is only by growing faster that we can afford the infrastructure, the public services and the lifestyle we all aspire to.

But it’s more than that. If we don’t give the people with get up and go more opportunity to get ahead here in New Zealand, they will get up and go to somewhere more welcoming, where they can get ahead.

That’s already happening. As a result of the past five or six years of economic mismanagement, we now have record numbers of New Zealanders voting with their feet and moving to Australia and further afield. And need I remind you, Australia is currently cutting taxes. With a Labor Government no less.

On this side of the Tasman, we have got ourselves into a bit of an economic doom loop, where we increase taxation, increase the size of Government even faster, increase debt, squeeze businesses and families, and make it more attractive for people to bring up their families elsewhere. One big step to breaking that doom loop is to reduce the burden of taxation to give people more opportunity to get ahead in this country. That will help turn our recession story into a growth story.

Be under no illusions. The state of the government books will mean that this year’s tax cuts are likely to be no more than a downpayment on what’s required to return New Zealand to being an attractive place to start a business and bring up a family. After all, unlike Australia, we don’t have millions of acres of iron ore to dig up.

But it’s important we get started. We need to start giving hard-working Kiwis some economic hope. There are some economists who could perhaps factor that important dynamic into their spreadsheets.

Steven Joyce is a former National Party Minister of Finance and Minister of Transport. He is director at Joyce Advisory, and the author of the recently published book on his time in office, On the Record.