Revenue Minister David Parker. Photo / Kevin Stent
OPINION:
Will Labour's GST U-turn do the Government much damage? Probably not – it's insignificant in the greater scheme of things. Most likely, the flip-flop will soon be forgotten. What's more, the details of the ill-fated tax proposal are almost too technocratic to even comprehend or care about.
The problem for Labour, however, is that this latest saga reinforces a number of narratives building up about the Government.
The Government clearly wanted their tax change on KiwiSaver to fly under the radar. It buried the big change in a larger omnibus piece of legislation dealing with lots of tax issues. And when this bill was introduced to the house, an accompanying press statement entirely neglected to mention the biggest and most controversial change that was being made. Normally such big reforms would at least warrant a press conference to explain them. In this case, Revenue Minister David Parker didn't want to draw attention to it.
This adds to the growing narrative that this government attempts to undertake reform without proper consultation or communication, and sometimes does things in a stealthy way that lacks democratic integrity. Prominent KiwiSaver fund manager and commentator Sam Stubbs complained, "They almost tried to get this through without us knowing about it."
Today's Herald editorial argues the Government could have been upfront and made a good case for the reform: "An inclusion of the move could have couched the proposal in terms of international comparisons, fairness to harder-hit GST areas, and in taking a reasonable return from overseas-based KiwiSaver providers. To downplay a major impact is one matter, to fail to mention it at all would seem to be priming the fuse on a political incendiary and handing the opposition a match."
But Parker and the Cabinet must have lacked faith they would win the debate. As financial journalist, Frances Cook says today, "If the Government genuinely thought people wouldn't mind an extra tax on their KiwiSaver, they probably wouldn't have tried to make the change as quietly as possible."
Fortunately, the media picked up on the changes and publicised them, creating a debate. Broadcaster Lloyd Burr commented: "It has to be the best example of how not to govern, how not to do politics, and how not to treat the public. You do not slyly try to introduce a new tax without even telling the public, without being upfront about it, or without issuing a press release … And it feels sneaky. And slimy. And secret … I've lost more faith in this government."
Political commentators are united over the lack of competent political management displayed by the Government in this episode. The consensus is that Cabinet should never have agreed to the policy, nor implemented it in the way that Parker was planning. The fact that the Labour politicians were oblivious to how this would play out, strikes most as an indictment on their political antennae, or perhaps even suggests arrogance or over-confidence.
RNZ political editor Jane Patterson discusses the negative optics of the reform: "The politics for the Government were horrible: from a party promising no new taxes, during a cost-of-living crisis where people are seeing their wages disappear into the inflation black hole, as retirement savings plummet amid market turmoil."
The Herald's Thomas Coughlan also explains how strange it is that Labour were blind to how unpopular this would be: "The Government didn't seem to understand that people would be upset at a tax on their retirement savings. This is no small tax. It would hit three million people with KiwiSaver accounts, 15 times more than the 200,000-odd hit by Labour's top tax rate or investment property changes. People were understandably worried."
Parker shouldn't have been ignorant of the potential for public worry or backlash, because officials pointed out to him in their Regulatory Impact Assessment on the tax change that the public would be negatively impacted by it.
In this case, it seems that Labour was just out of touch with the public. Financial journalist Pattrick Smellie concludes: "The prime minister, and the finance and the revenue ministers must have been asleep at the wheel when this proposal came to cabinet decision-making. There can be no other explanation for one of the most remarkable political blunders of recent times and for its almost instant demise."
Political parties often make big mistakes with policies when they have lost their ideological compass or anchor. A party that is adrift in a sea of policies can forget what they are in power for.
In the case of Labour, they seem to have lost ideological underpinnings that would give them a sense of direction and purpose. In the past, they might have taken a leftwing or progressive orientation to tax, but now they flounder around on such issues, flip-flopping constantly. This was most apparent in the case of the proposed capital gains tax – Labour was for it one day, and the next they were ruling it out forever. And on wealth taxes in general, it's hard to see what Labour believes in, if anything.
In the case of the proposed new tax on KiwiSaver fees, it looks like Labour was just responding to technocratic logic, rather than thinking about how this would impact the public, and especially its traditional working class and poor base. As Coughlan explained: "This tax proposal did not work because it took thousands of dollars from vulnerable, renting retirees ..."
He also points out that Labour failed to make a case for what it might do with the increased tax take: "the party puts too much emphasis on increasing the size of the state, and neglects to ask itself what it's taxing people for."
Parker did make some attempt to argue that the tax change was about "fairness", but this wasn't entirely convincing because the end result would be to disproportionally penalise the poor, who are more reliant on KiwiSaver for their retirement than, for example, those with housing investments. And, notably, Labour still refuses to do anything about correcting the unfairness in housing sector investment – huge capital gains are largely untaxed.
Some have also argued that introducing taxes that negatively impact on KiwiSaver investments is not a very progressive policy. Today, Frances Cook says KiwiSaver is "one of the few egalitarian ways we have to build wealth in this country, and help people improve their financial situation. Whether you get paid a little or a lot, you can start building up your retirement fund, $5 at a time if that's all you have. [And]… KiwiSaver is already overtaxed compared to retirement funds in other countries."
By some accounts, Labour's proposed tax changes to KiwiSaver were five years in the making. But they gave the impression of a poorly formed policy that was decided and implemented on the hoof.
Unfortunately, Labour has announced so many policies in government that appear to be done without a robust policy-making process. The need to consult properly and have a public debate before a decision is lost on Labour. Hence incredibly expensive harbour cycle bridges are announced and then axed, and the Three Waters programme was developed behind the scenes and forced on the public without a mandate.
According to Parker Labour was surprised by the negative reaction to the KiwiSaver tax policy from finance businesses – and that's why he claims the policy had to be axed. Parker says they expected much of the industry to welcome the changes, which clearly means something went wrong with the consultation process.
In announcing the backdown, Parker has said that "the big winners" from his decision are the big Australian banks that run most of the KiwiSaver funds. Therefore, some might criticise him for deciding to continue to subsidise these companies with a large tax exemption. Once again, this is reminiscent of the backdown on a capital gains tax, with Labour acknowledging that the wealthy were the winners from having no real tax on wealth.
Of course, as with a wealth tax, Parker's tax on KiwiSaver fees had some merit. This was, after all, a chance to ensure that GST applied to all economic activity, including fund managers.
This backdown makes the Labour government very inconsistent on how GST is applied. This is important because the Government has used the logic of consistency as a reason not to take tax off things like fresh fruit and veges. Their argument for this made sense, but less so now that they are happy to allow financial services an exemption. As tax experts point out, there is no good argument for the Government's continued approach.
A lot of Labour's problems over yesterday's tax dilemma go back to the party's determination to convince the public that it won't carry out tax reform. Labour is scared of being painted as a "tax and spend" party, and hence promised at the last election to bring in no further taxes beyond those minor ones campaigned upon.
This has opened the Government up to greater scrutiny about their tax agenda. As Coughlan has explained today, "Labour proceeded to break its promise in spirit if not letter, multiple times this term, most obviously in its extension of the bright-line test, the removal of interest deductions for landlords, and now, on GST. The party needs to regain the public's trust on tax. It won't do that through stealth taxes on their savings."
Broadcaster Heather du Plessis-Allan also added that the new "retirement tax" was "objectionable" as it was "on top of the ute tax and the Amazon tax and the landlord tax and the longer bright-line test tax".
Perhaps the answer should have been to use Bill English's model of a "tax switch" – in which one tax is increased while another is decreased. In this case, Labour could well have used the increased tax take on KiwiSaver fees to increase state contributions to people's funds – they could have even directed increased subsidies at lower income earners.
National was apparently "euphoric" with Labour's decision yesterday, but this didn't stop leader Christopher Luxon from then criticising Labour's U-turn, saying: "Clearly this is a poll-driven Government" and "The big takeaway from this is they are desperate to hang on to power and they will do anything that is needed in order to do that. They will even betray their own principles to do that and that's what we have seen."
A number of Labour supporters will indeed be worried about the trend of Labour backing down on things it believes in. Others will be worried that Labour lacked the political antennae to prevent the GST policy from being proposed in the first place.
Clearly, business interests had a big role in convincing Labour to U-turn. Businesses certainly reacted fast to try to influence the public debate against the change. Yesterday, corporate lobbyist Neale Jones, who is very influential with the Prime Minister and Cabinet, was pressuring Labour to quit the tax. He published a tweet in the mid-morning saying Labour had made an "error" with the policy and warned his former colleagues that it was going to be an "absolute gift for the opposition".
According to Newshub's Amelia Wade, "the Prime Minister read the tea leaves pretty quickly on Wednesday morning and got on the phone to tell ministers to tell them to ditch it, hoping there'll at least be some credit for the swift slaughter of a bad idea." A press release was then sent out at 1.16pm to announce the back down.
Even in announcing the U-turn, the Government had trouble being honest or straightforward about the reasons for capitulating. The main PR line was that the Government wanted to protect KiwiSaver from negative publicity. Parker announced: "We think the furore around this was denting public confidence in KiwiSaver".
The Prime Minister also put a positive spin on the U-turn, saying that it was simply a case of listening to the KiwiSaver providers. She explained: "We've heard very clearly from them they didn't think that's what it would achieve and so, simple, we won't change it."
Various government ministers, some of whom had been active in the media defending the policy in the morning, then came up with a whole list of other people to blame for the policy being withdrawn. The media were at fault for highlighting it, and allegedly "misreporting" the policy, some small KiwiSaver providers were guilty of not publicly speaking out in favour of the policy, and the Opposition was accused of misrepresenting what the Government were trying to achieve. Even IRD and the Treasury somehow got the blame.
Little of this spin-doctoring will resonate much with the public. It looks like passing the buck to avoid admitting that they had blundered. This attempted blame-shifting will only reiterate to many that the whole exercise was a disaster for Labour from go to whoa.
• Dr Bryce Edwards is Political Analyst in Residence at Victoria University of Wellington. He is the director of the Democracy Project.
Armed police stood guard as the patched members were led out in handcuffs.