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National and Labour face tax cuts showdown

Contributor:
Fuseworks Media
Fuseworks Media

By Peter Wilson, NZPA Political Editor

Wellington, Sept 26 NZPA - Will you be better off this time next week? The Government says you will, the Labour Party says you won't.

Both have a lot riding on this. The October 1 tax cuts are the Government's biggest deal since it came to power and they are also Labour's best opportunity, since it lost power, to lift its poll ratings.

The Government has to prove people will be better off, meaning the "vast majority" of taxpayers referred to by Prime Minister John Key and Finance Minister Bill English.

Last week they released Treasury figures which they said did prove it, and in Parliament Key summed up the situation like this.

"Some politicians have been trying to convince New Zealanders that the October 1 tax cuts will leave most individuals and families worse off once the increase in GST and other cost of living adjustments are taken into account.

"Today I can tell you that the Minister of Finance has received advice from the Treasury that shows these claims are demonstrably wrong."

As he was speaking, Labour MPs shouted "rubbish" just so nobody was in any doubt about about the identity of the "some politicians" he was referring to.

Labour leader Phil Goff says that as well as the increase in GST from 12.5 percent to 15 percent, which also happens on October 1, there are other cost of living increases which must be considered. He cites rents going up, ACC charges, rates and the cost of childcare, among others.

This is where the tax cut controversy moves into a grey area, because those other cost of living increases have different effects on different households and can't be fixed into firm projections.

Nonetheless, the Government is staying with its "vast majority" prediction.

And Labour is staying with its claim that the tax cuts will be washed away by GST and other cost of living increases.

Labour is also making a case that the cuts aren't fair, which is another direct challenge to the Government's assertion that they are.

Goff on this issue: "When he (John Key) says that the vast majority will be better off, does he not really mean that the top 10 percent of taxpayers, who get 41 percent of the tax cuts, will be a whole lot better off but the bottom 20 percent of taxpayers, who get 2 percent of the tax cuts, will be a lot worse off?"

Key responded to this question in Parliament by saying: "I point out two-thirds of the entire tax cut package was applied to the lowest two rates."

Maybe so, but the way this cookie crumbles leaves Labour with some tasty examples to quote.

Like Telecom boss Paul Reynolds, who earns $5 million a year and is going to get a tax cut worth $4800 a week, compared with the Government's own figures for a family on the average income of about $76,000 a year which is going to get $25 a week.

It will take time for the dust to settle and for families and individuals to figure out how they fit into this new tax regime, but some have tried to work it out in advance.

Two examples have been published by the New Zealand Herald.

Anne Mason is a part-time teacher who lives with her husband, a full-time teacher, and they have two children aged six and four. She used the Government's online calculator which showed that on their family income of about $65,000 they would be $8 a week better off. "It looks good, sort of, on paper but I don't think that it really is that advantageous."

Munish Pathak is a security guard who earns just over $41,000 a year and his wife is a nursing student. He thinks they will gain nearly $27 a week from the tax cuts but will pay an extra $14 a week because of the GST increase. He thinks life is going to get harder.

"GST is going to affect each and everything that we do every day. Anything you buy is going to go up and bringing down the tax rate is not going to give you all that much money to cover all these costs."

Running in parallel with the tax war that is going on between National and Labour is something more fundamental, which is the reason the Government has changed the system.

It is part of its agenda to "rebalance" the economy, to move people away from spending and investing in houses and towards saving and investing in productive areas like businesses.

This is a long-term objective which will take more than one term of Parliament and probably more than two before it really starts to work.

The Government is seeing some early results, however, and they have been oddly problematic.

Reserve Bank governor Alan Bollard reported last week households were being more cautious with their money than he had expected, and English concurred.

Partly because of this, the June quarter economic figures showed gross domestic product grew by only 0.2 percent. The Reserve Bank had forecast 0.9 percent and the Government admitted the result was disappointing.

Because people aren't buying as much as they were, there was a significant drop in manufacturing. The Manufacturers and Exporters Association drew urgent attention to this and called on Bollard to cut interest rates.

He told Parliament's finance and expenditure committee there was "a long way to go" before he considered doing that, but Key made the remark that Bollard wasn't going to be in a hurry to raise them again.

This situation has given Labour another stick to beat the Government with. Finance spokesman David Cunliffe says the recovery has "run out of puff" and the Government's policies clearly aren't working.

He will have a lot more to say about that, and about the impact of the tax cuts, in the coming weeks and months.

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