Editorial: 'Step-change'promise more likely a stutter

Prime Minister John Key. Photo / Paul Estcourt

In his statement to the opening of Parliament yesterday, John Key spoke of his intention to achieve a "step-change" in overall economic performance.

With his popularity riding high in this, a non-election year, and with the country emerging from a global recession, this was surely the time to deliver.

Sadly, his agenda falls short on that score. There are worthwhile steps and hints of decisive action. But there is also a timidity that rules out the sort of transformation talked about by the Prime Minister and necessary for this country's progress.

The focus of Mr Key's speech was always bound to be tax reform, especially in the wake of recommendations from the Tax Working Group.

It had described the system as broken. The Government's broad response favours an across-the-board reduction in personal income taxes and an increase in GST from 12.5 to 15 per cent. Both these steps are welcome as a better balance of revenue sources.

But just as important as any reduction in personal taxes would be the alignment of the top personal, company and trust rates at 30 per cent. This, a "medium term goal" for the Government, should not be delayed. It would cure much tax avoidance at a stroke.

Mr Key said tax cuts and increased GST would encourage savings and investment, rather than consumption. That is correct to some degree.

But he also knows the increase will be criticised for affecting those on lower incomes more than the wealthy, and that he will be accused of taking from the poor to finance tax cuts for the rich.

For that reason, he has pledged that the vast bulk of people will be better off, a task to be achieved at considerable cost through compensation for those on benefits, superannuation and Working for Families. Yet, in reality, increased GST will represent little more than a blip for most people.

The Government's approach goes some way towards addressing the working group's concern about this country's heavy reliance on the taxes most harmful for growth and subject to the attractiveness of other tax jurisdictions.

But it fails palpably to address the group's worries around the hole in the tax base arising from property taxation. A land tax has been rejected, as has a capital gains tax and a tax on the rental value of investment properties.

None of these would have been straightforward, but all would have represented a considerable disincentive to investing in a sector that cost the Government $150 million in lost revenue in 2008.

As it is, the changes to the way property is taxed, to be announced in the Budget, will amount to tinkering. The options include stopping landlords claiming depreciation on buildings, ring-fencing losses from rental property against other income, and putting an end to loss attributing qualifying companies (LAQCs).

But ring-fencing is a concept that invites a creative response, while LAQCs would lose their allure if tax rates were aligned. The revenue garnered from this approach will be nothing like that extracted by a bolder solution. Nor will it deliver anything like the required blow to the attractiveness of rental property investment.

More positively, Mr Key signalled that the days of upper-income families arranging their incomes to qualify for Working for Families were coming to an end.

He also talked in tougher terms about reforming the benefit system. Adjustments would be made to the criteria and testing for a sickness benefit, and there would be stricter re-application rules to prevent people languishing on an unemployment benefit.

There will be wide public support for these, as there will be for tax cuts. But they were easy options. This is a year when hard decisions could, and should, be made.

Only they will deliver economic growth and sound public finances. Mr Key has delivered not so much a step-change as a stutter.