Labour leapt on board to say that this goes to show what happens because of cuts like those National has proposed. The Opposition retorted that its tax-cut scale was totally different, as were New Zealand’s circumstances.
Meanwhile, this week featured New Zealand economic news pertaining to the tax debate. Reactions were again predictable, with partial truth to each point of view.
New British Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng pressed their tax pronouncements, funded from borrowing.
Economics 101 says that increasing the money sloshing around would be like pouring petrol on the inflation fire. Sure enough, "the markets" reacted with horror. Conservative MPs rebelled as their party’s popularity plummeted. The Bank of England had to intervene in the face of diminished investor confidence.
Within days, an embarrassing backdown took place, and the worst of the crisis was curtailed for now. Disliked plans to cut the highest income tax rate were removed. But that still leaves £43 billion of the £45 billion package in play.
This country’s finance minister, Grant Robertson, revealed on Wednesday the Government’s books for the year ending on June 30. The $9.3 billion deficit was nearly $10 billion closer to surplus than the May forecast. Corporate tax increased by $4.1 billion and worker income tax by about $4.3 billion, an 11.2% rise.
Take out the big Covid spending and the path to surplus — subject to no looming international recession — is close.
Mr Robertson said this was not the time to fritter away money for the wealthiest New Zealanders and property speculators, having a dig at National policy. National finance spokeswoman Nicola Willis said the accounts made a strong case for tax cuts. In five years, tax revenue had skyrocketed 43% to $108 billion, an average of $15,000 more in tax for every household.
Opposition leader Christopher Luxon had been assertive about the tax cuts. But a TVNZ-Kantar poll has shown the public is wary. The abolition of the top tax rate, 39c above $180,000, attracts little sympathy, as does the return of rental property tax deductibility.
National, however, has shown signs of softening, notably saying the timing of tax changes depended on the right monetary conditions.
Both tax cuts and increased Government spending put more money into circulation and can bolster inflation. The salvos are being fired regularly in what will be a key issue in next year’s election.
Canny Mr Robertson could well try, especially if finances continue to exceed expectations, to spike National’s guns with some tax adjustments aimed as much as possible at middle- and lower-income earners. National has reasonable grounds to adjust tax thresholds. Inflation keeps pushing parts of incomes into higher tax brackets. "Fiscal drag", also known as "bracket creep", is an every-year tax increase that governments exploit. It seems wrong that the minimum wage for a 40-hour week is now not far away from the 30c-in-the-dollar rate. That tax burden is, of course, exclusive of another 15% impost in GST.
Naturally, however, the wealthiest are likely to benefit the most in dollar terms from inflation-adjusted threshold changes. Fundamentally, that is because they are paying the most tax in the first place.
This week also saw the official cash rate rise by another 50 basis points, as the Reserve Bank endeavours to do its bit in fighting inflation. The Reserve Bank is obliged to take away gains through higher mortgage and other lending rates should extra Government spending or tax decreases boost inflation. Neither National nor Labour, via tax cuts or higher spending, will be extreme like Ms Truss. Both will need to be constrained in what they promise and what they deliver.
