OnPoint by Keith Ng

Key puns are too easy so I won't do it (updated with question for readers)

A lot of people have told me that they find John Key to be an insincere guy. I got a vague sense of that, but since we were talking about economics, I didn't do much staring into his soul. I've found his rhetoric in and out of the House to be rather alarmist, so I was surprised (and disappointed) that he was much more down-to-earth in our chat.

I put Treasury's Long-Term Fiscal Position Statement to him:

"The New Zealand Government's current fiscal position is strong, by both historical and international standards. Debt is low, assets are being built up to provide a buffer against future shocks and tax and spending rates have been stable and predictable."

Key concedes that the Government's fiscal position is good, but says that Labour can't really take credit for it. The effects of government policies on the economy is felt over many years, and it's not obvious in the short-term. The Government hasn't really lowered debt - only lowered debt as a percentage of GDP (i.e. GDP has risen, debt has stayed the same) - and so the popular conception of this Government as ultra-prudent is, well, wrong. Labour's just been lucky, but Key does give Cullen some credit for "not spending all of it".

The image that he paints, rather, is of a Government that is riding some spectacular economic fortunes and using it to finance an ever-growing state sector to little effect. He points to the razor gang and to reviews in the health sector as evidence that the government recognises that money is being thrown into system without any tangible outcomes.

It's essentially still the hip-hop tour argument (though, thank god, they've finally stopped flogging that dead horse) - the idea that the state sector is perpetually squandering tax dollars, and a baseline review is necessary to cut back some of this waste.

$500m, at least, is what he reckons a review can squeeze out. So while National would cut $500m off future spending, it's not really a cut, because it's all waste. Presumably.

That will fund part of the tax cut, the rest will come from debt.

Currently, Labour is aiming to keep government debt at 20% of GDP. Of course, if you factor in the Super Fund, then the government is already out of debt. National will keep debt at around 20-25% of GDP, which is still low, but - obviously - higher.

The question then, is why tax cuts? Why put the country into more debt to cut taxes? What benefits will it bring, and for who?

The goal, as Key sees it, is the same as Cullen's - to prepare the country for an uncertain future in the long-term. The difference is that Cullen believes the best way to prepare is to save money, reduce debts and build assets, while Key believes that tax cuts will put New Zealand in a better position in the long-run.

He runs three arguments:

1) Lower taxes will keep more Kiwis at home.

The first one has been the most public and transparent argument. Kiwis leave because they can make more money elsewhere. So tax them less, they'll be able to earn more, so more of them will stay, right?

A few PA readers pointed to Key's recent press release which said that the average Australian after-tax income is higher than the average Kiwi pre-tax income. Sure, this highlights the income gap (though it doesn't take cost of living into account), but it begs the question: Does that mean we have to eliminate income tax to compete with Australia, or the rest of the world?

Key says that New Zealand will never be able to match places like New York or London for income, but people give up a lot of things to live in those places, and will be willing to accept less money for the lifestyle that New Zealand offers. But Key stresses that tax cuts is not the be-all-and-end-all - it's only one of many measures that he thinks is necessary to make New Zealand a more competitive place to work and do business.

The other measures are things such as investment in education, research, infrastructure, etc. When I asked Key why we should put money into tax cuts and not education/research/infrastructure, his answer was that they're all of "equal priority". I'm taking that as a fob-off answer.

2) Lower taxes will make people more productive.

The second one is a bit tricky. It's often taken as an article of faith by Neoliberals that lower taxes will make people work harder, and therefore make more money, and therefore pay more taxes. And because it's such an article of faith, the Left dismiss it as voodoo economics.

It's not impossible; in fact, it's perfectly plausible. The problem is that it's not a matter of X% decrease in taxes = X% increase in growth. The issue is how much.

Key plainly states that the tax cuts are not self-financing. i.e. The productivity growth will not offset the lost tax revenue. Instead, he considers it to be a long-term investment in productivity gains, with an aim of boosting annual growth by 0.5%.

Long-term economic growth is what he has his eyes on.

3) A government should not tax more than absolutely necessary.

He sees tax cuts as an investment in the private sector - i.e. That there is a public good to be gained from private profit. But in rhetoric, he often switches back to 'it's the people's money, not the government's' line. I suppose, to a Neoliberal economist, the two arguments are perfectly aligned.

The Cullen-Brash/Key dynamics is pretty interesting. I think there's a degree of mutual respect between them, as people who know what they are talking about (aka: people who think nobody else knows what they're talking about).

I was expecting more of their philosophical differences to come through as Keynesian vs Neoliberal fisticuffs, but that wasn't the case. I put Cullen's idea of "automatic stablisers" (keeping government spending stable so that when the economy is doing well, the government saves more and takes some heat out of the economy, and when times are bad, the government runs a deficit and puts some more money back into the economy) to Key, and he says he agrees with the theory, just not the degree to which it's being done.


One of the questions I received last week was: “Can he explain the advantages of an economic ideology based on greed over an ideology based on fairness?” Well, that's not where the party lines are drawn. Both Labour and National are concerned about New Zealand's future in the long-term, both believe that growth is key. National believes in incentivising growth through lower taxes; Labour believes in encouraging growth through social investment. Both are legitimate paths, neither are sure bets. But on the bright side, both parties recognise that right now, we have the luxury to prepare and to choose.

I'd hate to see the idea of a tax cut not being given a fair chance simply because it makes Neoliberal fanboys cream their pants. It's certainly not free, but it can be of public good in the long run. But at the same time, there are risks and assumptions that come with it, and they should come part and parcel of the argument. Growth is not guarenteed. We could well find ourselves 20 years down the track with a gaping deficit and nothing to show for it.

[Ow-my-swollen-moral-panic aside: Three not-quite-eighteen-year-olds have been caught drinking beer. It's “an abuse of trust”. The Minister “must make sure someone is held accountable”. It's “a parent's worst nightmare”.

Worst. Nightmare. Ever.]

[Update: Question for the audience - if Labour cuts taxes before the next election, how would you react?]