Ok. I get it. Any serious tax cuts are not on the board for some years to come because we’re not willing to go for real cuts in government spending and without that we’re going to push inflation (and thus interest rates) higher not lower, among other bad things. We need the tax revenue… But this is where my point about economic theory vs. political reality comes into view. In playing by these rules, National and ACT are ensuring that we will never get out of a future high-tax-high spending trap.

From what I’ve read on economics blogs and other site, the vaunted “tax cuts” that may be coming from our National-led government in the May budget, would be more accurately described as tax adjustments, since they’re changes in the income bands at which each tax rate applies.

Yes, the effect is that you should have more after-tax money in your pocket so it counts as a “tax cut”, even if it’s not what is normally meant by that term, which would be a reduction in the rates themselves.

In any case it’s a good thing, given what several years of inflation has done to push low-income earners into tax brackets that surely were not intended for them – like the 30% band – especially by the Left who are always going on about such workers. It’s reached the point highlighted in a series of Kiwiblog posts on improving the lives of beneficiaries by getting them out of the government trap:

For this household 83% of the increase in the minimum wage actually flows to the government in taxes and clawbacks. This household is a perfect example of the type of household we’d typically talk about when increasing the minimum wage – a single wage earner with two dependents. And yet, that minimum wage increase costs business a lot of money, most of that money flows to government. 

Tax brackets should have been indexed to the CPI decades ago after the brutal inflation of the 1970’s and 80’s, and frankly I was shocked that the supposedly business-minded Key government didn’t do it, merely promising to do so if they won re-election in 2017. But all politicians like ever-increasing tax revenue, albeit because the Right want to pay debt down, while the Left want to increase government spending.

Anyway, we will see exactly what the details of change and CPI-indexing are in the budget. It would be nice if the effect was to re-set tax rates/income bands to that of 2017. As far as rate cuts are concerned, that’s going to have to wait until our economy is in better shape – and if government spending is truly curtailed.

And I have grave doubts on the latter. Aside from the relentless increase driven by an aging population hitting our healthcare services and pension (superannuation) and immigration numbers hitting everything else, the current government’s attempts to save money by cutting the phenomenally bloated numbers of civil “servants” is an indication that cuts are not going to be what some may have imagined.

Ministers demanding a 6.5% cut in staff, following double-digit percentage increases across-the-boardin (some specific departments at three-digit increases) is just a joke, especially since canny CEO’s of government departments will just lay off contractors and the most recent hires – all while their people leak to the MSM tales of pain and suffering in a Chinese Water Torture effort that will likely see National’s demands for staff cuts quietly dropped after this year. At which point it will back to the infamous “sinking lid” policy of no new hires for a few years and supposedly allowing a growing economy and increasing population (probably via immigration) to make the civil servant ratio more acceptable.

Who knows but by 2032 National may have got us back to 2017 levels – just in time for Labour to return to power and pump it all up again.

And that’s the biggest problem I have with the right-wing opposition to tax cuts (or “tax relief); they focus on economic theory (and reality) but ignore political realities. Here’s economist Oliver Hartwich, Executive Director of The New Zealand Initiative, a public policy think tank in Wellington, New Zealand, writing about the challenges in implementing tax relief right now:

The New Zealand government now faces the urgent task of getting public finances back on track. The first step is to curb spending. Tax cuts at this juncture would only make the necessary fiscal consolidation more challenging. They would complicate efforts to bring inflation under control.
…
Margaret Thatcher, who took office in 1979, faced a situation not unlike the one confronting Luxon today. The British economy then was also struggling with high inflation, rising interest rates, and a ballooning budget deficit.

Thatcher was an economic liberal, of course, who loved nothing more than low taxes. However, her priority was fiscal consolidation. She did cut some taxes, particularly the top rate of income tax. But these cuts were offset by increases in other taxes to avoid adding to inflationary pressures.

Except Thatcher had five-year terms of office, long enough to get past any recession, inflation and fiscal problems and start locking in things like tax cuts.

Moreover, her era also involved massive amounts of de-regulation and privatisation that delivered on more efficient government and a severe restraint on large, future increases in government spending, as did efforts of Roger Douglas and company a decade later here in NZ. But those were one-off’s that, by their own definition, are not going to be repeated (aside from the fantasy world where healthcare and pensions are largely privatised).

Finally of course, Thatcher got multiple terms of office – notably with some luck in 1983 due to the Falkland War and Labour choosing the doddering Far Lefter Michael Foot as leader – eventually stretching to 1990, with her Tory Party surprisingly winning without her in 1992 to make the whole effort last eighteen years (not that John “Steady As She Goes” Major did much with the win).

In the face of that there was nothing for the Tony Blair Labour Party to do except suck it all up and move on, as Helen Clark and Michael Cullen did here with Rogernomics after the 1999 election.

And of course even these heroic efforts have been slowly ground down by none other than the most recent Tory government, whose fourteen years in power now see Britain with the highest levels of state spending as a proportion of GDP and tax burdens in half-a-century.

Meanwhile here in New Zealand I don’t think anybody sees National getting more than three terms in office, four if they’re very lucky. Which means Labour is back in the big-spending saddle by 2032 or 2035, and likely more Left-wing to boot, judging by the younger MP’s and activists coming up through the ranks.

Meantime another NZ economist, Eric Clampton, focuses in on spending even more than Hartwich does:

The only real tax cut while in structural deficit is a spending cut.

Echoed by Not PC where he quotes Milton Friedman in Tax cuts without spending cuts are not tax cuts:

“Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.”

And of course another NZ economist has already pointed out the brutal truth that National has deliberately chosen to keep these structural deficits: an implicit acknowledgement that spending cuts are not in our immediate future, for all the palaver about 6.5% civil servant staff cuts:

Structural deficits – by definition – do not go away of their own accord as the cyclical position of the economy improves. They are removed only by conscious and deliberate choices by governments, and – by the same token – if they are left to linger that is a conscious and deliberate choice by a government.

Ok. I get it. Any serious tax cuts are not on the board for some years to come because we’re not willing to go for real cuts in government spending and without that we’re going to push inflation (and thus interest rates) higher not lower, among other bad things. We need the tax revenue.

But this is where my point about economic theory vs. political reality comes into view. In playing by these rules, National and ACT are ensuring that we will never get out of a future high-tax-high spending trap. Every improvement they make in the fiscal position takes time in the political cycle and simply leaves the next Labour government all the room in the world to piss money up against the wall and stuff tax cuts again, or even force tax increases.

Look what happened with nine years of Key government, where we got some small tax cuts, offset by a GST increase so we could be “revenue neutral”. Now we’re in a worse position than in 2008-2011.

Wash, rinse, repeat!

That’s one reason why I predict that our tax burden will rise in the future, including even taxes on unrealised capital gains income.