On Luxon’s “Cost Of Living Crisis” Gambit

Clearly, no-one should underestimate the political pulling power of a suit offering tax cuts. Last week’s rise of Christopher Luxon and the National Party in the polls is consistent, at least. John Key, Luxon’s mentor, also rode into office on the promise of tax cuts that also turned out to significantly benefit the rich – and we all paid for them afterwards with nine years of rising social deficits, crumbling infrastructure, polluted waterways and a rundown health system that left us totally unprepared for the pandemic. The good old days. Can Christopher Luxon bring them back again?

As many have noted already, Luxon can manage a reasonably good imitation of Key’s speech mannerisms and jaunty air of confidence. Last week’s gambit over the “cost of living crisis” was also a direct and telling example of Luxon echoing His Master's Voice. In 2015, Key got into a lot of trouble politically, for denying there was a housing crisis in Auckland.

Prime Minister John Key acknowledged the rise in house prices in the city were unsustainable, but said there was no crisis. "No, I don't think you can call it a crisis. What you can say though is that Auckland house prices have been rising, and rising too quickly actually."

Key caught flak for those comments. Trying to trap Jacinda Ardern with the same stratagem felt like Key seeking utu, and using his protégé as his payback device. In reality, the question “Is there a cost of living crisis” is a lot like asking someone when they stopped beating their wife. It’s a win/win, either way. If they say yes, that’s a confession of economic incompetence or worse. If they say no, it means they’re out of touch and living in denial.

In short, it's a gimmick question. The best response is to avoid giving a yes or no answer to the “crisis” bit, while pointing to what can’t be done, what can be done, and what is being done to help people cope with the rising cost of living. Newsflash: Labour is doing more to help people cope with the cost of living than National proposes to do if it wins Election 2023.

The evidence for that assertion was contained in a fiery exchange between Jacinda Ardern and Luxon in Parliament last week over the cost of living. It's worth watching the whole 14 minute clip to see one politician able to function solely in slogans going up against someone able to take the issues in question seriously, and return fire.

Crocodile, weeping copiously

To regard Luxon as a credible champion of those struggling with the rising costs of food and rent requires a bit of stretch. Luxon and the party he leads have consistently opposed raising the minimum wage and making any significant changes to benefit levels. They have also opposed fair pay agreements. In short, National – and Luxon – have opposed any policy changes likely to help low income earners cope with the rising cost of living.

More to the point, the tax bracket changes that Luxon mooted in his State of The Union speech would vastly favour the people who are feeling the least amount of pain from the rising cost of living. Those earning $40,000 would earn $2 a week extra. Those earning over $180,000 would benefit by at least $8,000 a year. (See other details in footnote below.)

In brief, the top 3% of earners and the country’s 120,000 landlords would be the big winners from (a) the proposed changes to the tax brackets and from (b) the scrapping of Labour’s ban on landlords’ ability to claim interest deductions on their rental properties.

As an added bonus to landlords, National also proposes to reduce the “bright line” test from 10 years to two years, thereby making it easier for people engaged in the speculative turnover of rental properties to avoid tax.

The fact that Luxon’s tax cuts would directly and substantially increase social inequality is only part of the picture. There is also a sizeable question mark over whether the agenda would be affordable without making significant cuts in social services. Keep in mind that the earliest at which a future National government could enact its tax proposals would be in the Budget for the financial year 2024/2025.

That simple reality exposes a fascinating flow in Luxon’s agenda. As both this article by Thomas Coughlan in the NZ Herald and this article by Jenee Tibshraeny (on the interest.co.nz website) point out, Luxon’s costings are being promoted (IMO, deliberately and misleadingly) on the state of the economy right now at the Budget 2022 point. Sure enough, the government revenues currently available are sitting at a unique, one-off level of $6 billion. (But Finance Minister Grant Robertson has already earmarked much of that money to write off DHB debt and to fund this country’s response to climate change.)

The wider point being, these revenues will be sitting at only roughly half the current level in 2024 when Luxon, if elected, could start to put them into effect. An operating surplus of only $3 billion is being predicted for 2024/25. That makes Luxon’s entire plan far more unaffordable than he is currently – and falsely – portraying it to be. Tibshreany spells it out:

Highly variable projections suggest the cost of National’s tax policy would be $2 billion in 2022/23, and lift to around $3 billion by 2024/25, should it have made all its changes by then. That’s a fair bit more than the $1.66 billion Luxon has been discussing .

And as she succinctly says on Twitter:

…[National’s ] policy is likely to cost around $3b by 2023/4 - eating up the entire $3b of new operational expenditure pencilled in for that year.

In other words, a Luxon administration would have no money left over – after the tax cuts - to ensure the health system is still able to cope with long Covid, or with mental health, or with the needs of an ageing population, or with the rising cost of pharmaceuticals, or with climate change, or with paying better wages to nurses and the Police. The money for that would have gone up the chimney on tax cuts, and mainly to the advantage of the top income earners who are in least need of relief.

National’s headline costing last week - $1.66 billion – captures the cost of only some of the changes it is contemplating to the tax brackets. When fully phased in, the package would be costing almost double that amount, annually. Framing its affordability in terms of current economic conditions that will no longer exist at the time of implementation is deeply misleading. It is a bit like trying to sell a used car based not on its condition when you actually get behind the wheel, but on what it was like in the past, when it could better stand the pace out on the highway. Buyer beware.

Footnote One: Luxon tax cuts would not lift everyone’s ship to anything like the same extent. Reportedly, half a billion of the circa 3.5b a year would go to the bottom 66% of taxpayers and the top 3% would get around $2b a year, Coughlan in the NZ Herald does the sums slightly differently but arrives at much the same shocking result. The cost problem, he says, will be massive for National on three fronts.

First, it is likely to face an uphill battle selling a $3b tax package in which $1.7b of bracket changes go to all 3.2m income tax payers, but $1.4b in cuts go to the top 3 per cent of income earners and those who own more than one property. In numerical terms, half of the cost of the package would go to all 3.2m income tax payers. while the other half would be split between New Zealand's 120,000 landlords and 120,000 taxpayers who earn over $180,000…It's hard to see this as politically tenable, especially given obvious Labour attacks on Luxon's personal wealth and background.

And that’s not all. To repeat:

Luxon's other challenge is painting this as fiscally conservative. Again, funding this out of Budget 2022 conveniently allows him to avoid answering this question now when the operating allowance is $6b. That won't be the case in 2024, when the operating allowance is slated to be just $3b.

Footnote Two: One of the other interesting aspects of Luxon’s tax agenda is that it is premised on tacitly accepting Grant Robertson’s assumptions about where inflation is likely to track in the medium term. As was also pointed out by Coughlan in his NZ Herald piece:

Luxon's problem in funding his cuts this way is that it would appear he's signed up to Robertson and Treasury's way of thinking: that this wave of inflation is transitory, and not worth setting-aside big spending promises over. He's tied himself to Robertson's argument on inflation, structurally weakening one of the strongest arguments against this Government, which is that cost increases are punishing people on low incomes.

In essence, higher inflation and rising prices – already at crisis point, according to National– would be the almost certain outcome of a tax cut package supposedly meant to compensate for them. Unless of course, this cost of living spike turns out to be only temporary. That is exactly wha is being forecast. Come 2024, inflation is expected to be sitting at 2.7% annually, which is well within the Reserve Bank’s target range. Meaning : Luxon’s tax cuts at the point of implementation will be a solution to a problem that he knows will no longer exist. But you didn’t really think the tax cuts were an honest response to the cost of living, did you?

Footnote Two: The above point is worth accentuating. The assumption shared by Treasury and Grant Robertson and consistently reflected in the RBNZ monetary statements, is that the current rate of inflation will be only transitory. (This belief is also shared by Nobel prize winning economist Paul Krugman, among others.)

True, inflation is spiking higher and staying there for longer than what was being predicted in early to mid 2021. Yet the medium term/long term forecasts are still assuming that the supply chain blockages, the impact of Covid support measures and the Ukraine war-driven spike in the price of oil will all sharply reduce in the medium term, and inflation will recede as a consequence.

This affects Luxon’s proposed tax agenda in several ways. Logically, if Luxon actually thinks his tax cuts won’t be all that inflationary, then he has to be agreeing with Robertson that the current inflationary fires will have dampened down (certainly by 2024/2025) such that the economy would be able to then withstand a very large tax cut stimulus.

Yet as mentioned above, Luxon’s fully phased in tax cuts will be considerably bigger than the available revenue likely to exist (by then) to fund them. Therefore, this means that Luxon would either have to borrow to fund them – which would be inflationary m itself, since this would inject more money into the economy. Or, to fund his tax cuts, Luxon would have to reduce government spending elsewhere in the economy by cutting public services. That’s a much more likely outcome, especially if National still requires the service cutting, welfare bashing votes of David Seymour and his Act colleagues to get up over the line.

Quite a dilemma, and one entirely of Luxon’s own making. If they were ever to be enacted, Luxon’s tax cuts would risk bringing inflation roaring back into life just when Treasury is forecasting that inflation by mid-decade, would haver been brought back under control. It’s a grim joke, but Luxon‘s tax cuts really promise to revive the same cost of living crisis they were supposed to fix. (That point is made in Jenee Tibshaeny’s headline on her interest.co.nz article)

So voters could well be facing sizeable cuts to public services in order to finance a tax cut package that has no credible purpose at that point other than to disproportionately reward the wealthiest members of society. But that’s National for you. They really know how to run an economy for the benefit of the 3%, while screwing the chances of everyone else.

Footnote Three: Since National is promising to scrap the regional fuel tax, is Luxon willing to promise – hand on heart – that he won’t introduce congestion charging? National has flirted in the past with congestion charging. Surely Luxon needs to let the public know if National’s future plan or Auckland motorists will remove one unpopular roading tax, only to replace it with another unpopular roading tax.

Moreover, would the revenues from congestion charging deliver the same amount of revenue (as the regional fuel tax) with which to fund essential transport infrastructure projects in future? Almost certainly not. And if not, how would Auckland be expected to make up the shortfall? Probably, by local government raising rates through the roof.

Robertson’s Plans

Election 2023 is shaping up to be another closely contested election, much like the election of 2005. Now that almost all of Labour’s fair weather friends have deserted it and flown back to their ancestral home, Labour can and should - arguably – shed the shame it is prone to exhibit about being a left wing party, or being seen as such. It should use its majority in the House to do what its core supporters expect it to do. That's what a centre-right government in the same situation would do.

Budget 2022 will set the parameters for Election 2023. Robertson has already committed the vast majority of that $6 billion surplus to (a) the DHB debt write-offs related to the health reform exercise aimed at future proofing the public health system and (b) a huge $4.5 billion Climate Change Emergency Response Fund.

One can only hope that this might still leave some money left over for rejigging the tax brackets from the bottom up – and not, as National has done, from the top down. The former approach could well deliver significant relief to those that need it most, and also to the middle class. There would also need to be separate (and significant) increases in benefit levels.

But if Labour really wants to do battle with National on the cost of living issue there is – as suggested in this column a week ago – an obvious battleground. Namely, the supermarket duopoly. This is the gift that could keep on giving for Labour right up until election day, 2023.

If ‘twere to be done, it should be done slowly, in stages. In a 2010 Werewolf article (based on research findings by professor Tony Blakely of Otago Medical School at the time) there was clear evidence that health benefits would be achieved if GST was taken off fruit and vegetables.

For that reason, other developed countries routinely exempt fruit and vegetables from sales tax. (And shucks, their tax systems somehow manage to survive and flourish!) Thanks to advances in supermarket checkout coding, the compliance costs of doing so would be minimal. With a minimum of fuss, Woolworths could deploy similar coding here to what it uses across the Tasman for exemption purposes on certain food items. Yes, there would be anomalies at the margins but these would not impose costs on a scale remotely comparable to the wider good that could be achieved.

As for the people who claim that saddling GST with such exemptions would violate the purity of our GST system… How do these zealots rationalise the exemptions and conditional deductions that IRD routinely makes elsewhere in the tax system ? Only GST (allegedly) must remain sacrosanct. Surely, that argument is the wrong way around. Buying food – an essential of life – should be at the top of the queue for tax exemptions, and way ahead of the ability to write off (against tax) any number of business-related costs. And yes, there are bureaucratic costs in managing those other IRD exemptions. But for some odd reason, the need for business tax exemptions goes largely unquestioned.

Would the supermarkets actually pass on the savings? Hmm. That would be the beauty (and the political advantage) of holding the supermarkets to account in a series of graduated steps. The supermarket regulator recommended by the Commerce Commission could be invited to treat the passing on of the fruit and vegetables GST exemption as a test case of the chains’ readiness to act in good faith.

If there is evidence that the GST savings were NOT being handed on – and the onus could be put on the supermarkets to document that it was - this would then justify the government taking the nuclear option of breaking up the duopoly, and requiring the two chains to divest some or all of their product lines. At the very least, Labour could explicitly empower suppliers to be able to bargain collectively.

These are not fanciful notions. Arguably, they would have to be in place before any foreign third player would ever seriously consider entering this most rigged of New Zealand markets.

As the champion of ordinary Kiwis against supermarket predatory pricing, Labour would side-line Luxon’s current bleating about the cost of living crisis. Labour would have done so by being seen to be battling to improve the situation faced by consumers at the supermarket checkout. By doing so, it would have turned the “crisis” into a political asset. It should get cracking on it right now.

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