Luxon speaks to the media after the National Party Conference in Christchurch
Opinion
OPINION
After a week of mixed messages and contradictory statements, we now have the start of a tax and spending plan from the National Party.
It's promised to remove a slew of taxes it believes unfair and unnecessary. It also committed to increasing spending – by some quite significant amounts.While delivering this economic alchemy, it has also promised to manage the cost of living. That's no mean feat – so we should examine the proposals carefully.
Let's first start with the tax changes. National has promised to remove all of the tax changes since Labour came to office. Its promise is to index tax brackets to account for inflation in the four years up to December 2021. If National delivered that tax cut alone in its first Budget, it would cost $2 billion.
The government has $3b available to spend on new items in 2024, which means $1b left for everything else. Most of that remaining funding would go on the removal of the 39 per cent tax bracket, which would cost $780m in its first year.
The majority of the benefit from these two tax cuts goes to the top 3 per cent of income earners. The other main beneficiaries of the package are landlords. Three separate tax changes (bright line, loss ringfencing, and interest deductibility) are all reversed. That would cost a combined $730m in the first year, using cost estimates from IRD and Treasury. Add on the $150m a year that would have to be found for the removal of the Auckland fuel duty, and we are at $3.67b in total tax cuts in Budget 24.
The tax package has just broken the bank.
What that analysis doesn't discuss is spending. Finance spokesperson Nicola Willis said health and education spending would match "increases to the rate of inflation at a minimum, but allowing also for population growth and other pressures". That's a huge decision.
Next year, the government is poised to put in $1.3b of new money into health, and arguably even that doesn't meet inflation, population, and other cost increases. By Budget 24, that figure will be higher again. Giving the same treatment for education, and that's a new multi-billion spending commitment.
Remember, these spending promises must come out of a Budget that has already been exhausted by the tax cut promises. That means either more debt or less spending elsewhere.
Assuming that additional debt is off the table, this leaves cuts. The commitments to health and education make this tricky, as they are two of the largest areas of expenditure.
Christopher Luxon in June also ruled out reductions in welfare, claiming that National "will raise benefits if it wins power".
Welfare, health, and education make up the majority of the spending of government – around 75 per cent last year. That means massive cuts for the remaining areas of government to make ends meet.
Police, corrections, defence, primary industries, housing, environment, climate change, would likely face cuts not seen previously. That would mean fewer front-line staff, poorer quality essential services, and worse outcomes for New Zealanders.
Council of Trade Unions economist Craig Renney. Photo / Mark Mitchell
We should also note the date. We are still more than a year away from an election, and the plan set out by National means that there is nothing left in the tank for the rest of the campaign.
Every proposed spending increase, or further tax cut from National after this point adds to its problem. National has talked about increasing defence spending to 2 per cent of GDP, spending to tackle gangs, and its announcement on youth unemployment. It's going to be a difficult campaign if spokespersons aren't allowed to make any promises on the road.
Worst of all, the prescription won't tackle the key issue at hand – the rising cost of living.
Inflation is hitting those with the lowest incomes hardest. But most of the benefit of this change goes to the top income earners, or to landlords. If the tax changes were installed today a minimum wage worker would get $2 a week, while those on $250,000 get $125 a week.
A giveaway of that size would not only add to inequality in New Zealand, it would very likely stoke additional inflation.
Willis said in her speech at the party conference that "those who ignore the lessons of history are doomed to repeat their mistakes". It appears that National is at risk of repeating the same mistake that it made in 2020, when their fiscal plan was discovered to be full of errors.
The first requirement necessary whenever making a cut is that it is clear how it will be paid for. That currently is not the case with National.
Given the track record in 2017 and 2020, it is imperative that National shows where the money is coming from. That it has not done so should worry New Zealanders. It either means that it doesn't know or doesn't want you to know. Either should terrify you.
Given the size of the possible cuts to public services needed to deliver National's economic package, Kiwis deserve to know.
• Craig Renney is an economist and director of policy with the Council of Trade Unions.
