John Key MP
National Party Finance Spokesman
6 May 2006

Taxing Times

Address to National Party Canterbury-Westland Regional Conference

For the past six years this Labour Government has gone around the country claiming credit for an economy that has, on average, grown at about 3.8 per cent.

It is fitting that I should be in Picton to tell you that the gap between the truth of what has really caused economic growth, and the reality of who or what has caused it, is about as wide as Cook Strait.

The truth is, Labour inherited an economy that was buoyed by strong export prices, a competitive exchange rate, high levels of net migration and a strong housing market - all factors beyond the immediate control of this Government.
In short, they were lucky. Unfortunately for them and for New Zealand, our luck has run out.

The road ahead for the economy looks rocky, not the least of all because the impact of rising oil prices and a falling exchange rate are fuelling an overall inflation rate that, in the short term, will all but eliminate the Reserve Bank’s ability to cut interest rates.

In summary, New Zealand’s growth rate is flatlining, and skirting recession territory.

Kiwis are already starting to feel the pinch through higher petrol prices. Some have lost their jobs and many more will probably do so before the economy starts to climb out of its current malaise.

Meanwhile, the crisis in roading and energy infrastructure keeps on growing, with increasingly clogged roads, a creaking energy sector, and regulators creating ever-greater uncertainties for our vital infrastructure providers.
Added to this is the alarming dimension that though we did not grow at all in the last half of 2005 - and the first quarter of 2006 is shaping up to be similarly bad - the rest of the world is charging ahead.

A British economic research institute reported this week that the rise of China is helping the world sustain an exceptionally strong period of global growth - the best for a generation.

World growth was 5.2 per cent in 2004 and 4.7 per cent in 2005, the institute said, and predicted that it would hit 4.8 per cent and 4.5 per cent in the next two years.

That contrasts with an average of below 3.5 per cent growth a year over the previous three decades.

The forecasts for New Zealand look dismal by comparison.
Although little noted in the media, the International Monetary Fund issued a gloomy report on the New Zealand economy last month.

The report slashed the forecast for growth in the New Zealand economy in 2006 to just 0.9 per cent - down from 2.5 per cent expected just last September. In short, it found, New Zealand is expected to grow less than any other advanced economy - except Portugal - this year.

Meanwhile our closest neighbour and our big competitor - Australia - is expected to pick up to 2.9 per cent growth this year.

If I was tempted to be kind, then one conclusion I could draw would be that these poor results for New Zealand show that Labour has squandered the golden years of economic growth. However, it’s more accurate to say that Labour has contributed to this parlous state of affairs by raising tax rates, imposing new taxes and levies all over the place, and substantially increasing the size of the bureaucracy.

Labour has squandered those ever-growing taxes on poor quality programmes of dubious value - for example, the numerous low-value tertiary courses exposed through the past two years, all making a great contribution to the dumbing-down of education in New Zealand.

Meanwhile, far from cutting taxes, Labour has used the power of inflation to raise taxes and hog any benefits of a growing economy, and on the limited occasions Michael Cullen has trimmed any tax he simply adds a new one to ensure his already overflowing surplus remains that way.

A prime example of this is the carbon tax. No sooner had it been axed than he was hinting that the revenue loss should be made up by dumping the much-derided and miserly “chewing gum” tax cuts planned for 2008.

Tax was an important issue at the last election. And it was one that substantially differentiated a Labour Government with its simple philosophy of taxing everyone and everything to maximum, with the National Party’s core belief that hardworking Kiwis would be free to keep more of what they earn, to make more decisions on behalf of themselves and their family and, importantly, to face the right set of incentives.

I believe we showed at the last election a taste of what a National government is capable of delivering.

It was a plan I believe we can and should be very proud of it.
It might be helpful at this point to recap on some of the points of the 2005 tax cut package.

It was the largest and most comprehensive tax plan since the reforms of the 1980s; a plan that was all about putting those incentives back into the economy; a plan designed to reinforce our core values of rewarding hard work and personal responsibility; and a plan I believe we can be rightly proud of.
Some of the main points of the plan included the fact that:

• The 15 per cent tax rate, which now applies to income below $9,500, would be extended to $12,500.
• For income between $12,500 and $50,000, the tax rate would have been 19 per cent.
• The withholding tax rate for secondary employment would have been 19 per cent.
• Income between $50,000 and $100,000 would have been taxed at 33 per cent, and
• Income above $100,000 would have continued to be taxed at 39 per cent.

All this would have meant that 85 per cent of taxpayers would have paid tax at only 19 per cent or less before entitlement to benefits, the tax on extra work for a person on the average wage would have only been 19 per cent, and only 3 per cent of taxpayers would have paid the top rate of 39 per cent.

National’s package was fair, focused and, most importantly of all, affordable.
It is nonsense for Michael Cullen to claim otherwise. He knows full well that a combination of trimming a modest amount from the current bloated government spending, rationalising some of Labour’s election bribes, and growing government spending at a marginally slower rate than his Government intends to, fully funded this programme.

And what’s more, much to his displeasure, Treasury agreed with us, both in relation to the quality or lack thereof, of the current Government’s spending and the benefits to our economy of tax cuts.

Since the regional conference last weekend, we have seen some unfortunate and quite wrong headlines in the media about National’s tax plans. The headlines have said that National is “rethinking” its tax cuts.

Today, I want to set the record straight because nothing could be further from the truth.

Working New Zealanders need better incentives to work and get ahead in life from their own efforts. That is why tax rates must be cut, and thresholds pushed out.

It is a truism that we cannot predict what’s going to happen in the next two-and-a-half years with the fiscal and economic outlook.

But what we can say is that some media have mischievously or mistakenly assumed that just because we can’t guarantee the details of the 2005 tax cut package will be carried into the 2008 election, that means tax cuts are off.

Well, I’m here to tell you that tax cuts and better incentives for New Zealand workers are central to our growth strategy. They are most definitely on the agenda and will remain so.

Of course, details of the previous tax package are unlikely to be identical to the ones we campaigned on in the next election, and for some very good reasons. For starters, our plan included some elements such as canning the misguided carbon tax - something this Government have been forced to do because they simply can’t rustle up the numbers to pass it.

In addition, who knows what new taxes Labour will dream up and implement during the next few years. Already they are proposing the misguided capital gains tax on all shares other than domestic or Australian ones, and we know Treasury officials are working around the clock on Dr Cullen’s latest obsession, a payroll tax.

And, once Michael Cullen is gone, Labour may well take a more rational attitude to tax brackets, and push them out a little - if only for political reasons.
So, while the exact details will certainly be different, let me say quite categorically: tax cuts are very much centre-stage in our thinking.

Tax cuts to get better work incentives are core National Party policy.
Tax cuts are all about putting the right incentives into the economy for people to get ahead from their own efforts and increase the living standards of all.
That’s because National trusts New Zealanders to make good decisions for themselves, their families, and their businesses.

The first tranche of those tax cuts would have been in place by now.
Sadly, it is an opportunity missed.

Labour shows no sign of wanting to cut taxes, only to reward selected groups. No wonder more and more hard working Kiwis are overwhelmed with a helpless sense of despair and frustration that they no longer have the ability to make a material difference to their own living standards.

They also, and rightfully so, worry about the future of our country. They know the huge danger for New Zealand is that we are left further and further in the dust as the rest of the developed world - and increasingly the large developing countries - charge ahead.

I’m sure Hayley Moynihan from RaboBank will point out in her remarks the intense level of competition we face from emerging nations such as Latin America in our core export areas such as agriculture, forestry and fisheries. New Zealand needs to wake up to the fact that we face fierce competition from an increasing range of rapidly growing countries.

Though it is true New Zealand faces large and pressing challenges, we should also recognise the huge opportunities they present. The emergence of China and India, and indeed the whole of Asia, as an economic super-region is perhaps the single biggest factor that can transform our economy - if we get it right.

The opportunities are limitless. This country needs a National Government with the hunger, vision and determination to capture and convert that potential, and you can be sure that come the next election that’s precisely what National will provide.

Ends

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