Labour plans mixture of debt, spending cuts and higher top tax rate to pay for quake costs and revive economy

By Alex Tarrant

The Labour Party would pay for costs arising from the Christchurch earthquakes with a mixture of debt, a higher top personal income tax rate and the deferral and cancellation of certain policies and spending programmes, Finance Spokesman David Cunliffe says.

His comments are the most definitive so far from Labour on how it would look to deal with the fiscal fallout from the September 4 and February 22 quakes, alongside a weaker-than-expected economy in the second half of 2010 and into 2011.

Early estimates are the two quakes will cost government about NZ$10 billion, including NZ$5 billion of lost tax revenue over the next four years. Finance Minister Bill English has said the immediate costs of the quake will be paid for by increasing the government’s borrowing programme, which will take its net debt above government's 'comfort zone' of 30% of GDP in the next four years.

Government is then signalling spending cuts in areas other than health and education this year’s Budget, due to be released on May 19, in an attempt to get its books in order so it can begin to pay debt back in the 2014/15 year, although this may be pushed out to 2015/16.

However the government has ruled out any tax increases or new taxes in order to help fund the costs of the quakes. The Green Party has proposed a temporary levy on top of income taxes paid by those earning over NZ$48,000, with the idea being consistently shut out by the government.

Cunliffe told interest.co.nz there were four levers to be pulled in order to pay for the quake and get the economy growing faster than current projections.

“You can either grow the economy, you can pay for the earthquake by increasing your revenue stream, you can borrow, or you can cut expenditure,” he said.

“It’s not going to be one option, it’s going to be a blend of all four.

If Labour were to win the general election on November 26, it would defer, or reprioritise some expenditure plans.

No new missiles

“Some of the things that we want to do we will take longer to do,” Cunliffe said.

“The new missiles, well they might go altogether,” he said in relation to a plan to spend NZ$575 million on new missile systems for the Navy’s frigates.

“The Puhoi to Welsford holiday [highway] is a goner under us. We’ll build a highway in Christchurch thanks,” Cunliffe said.

“The Great Start Package for kids that we’ve been working so hard on – that’s going to phased in more slowly, and the zero tax zone [Labour’s proposed tax-free threshold of NZ$5,000] at the bottom, that’s going to be phased in more slowly,” he said.

“We said NZ$5,000 by the end of our first term. That might not happen until the second term.

“So there will be some expenditure reprioritisation and deferral on our side, and we will continue to have an eye, as we’ve always said, on value for money. So we’re not going to be a soft option on the spending side.

Growth enhancing initiatives

Labour would also look to invest in “growth-enhancing initiatives”.

“We do believe that there’s an opportunity to have a real economic development strategy here, and to work with regions and sectors to unlock potential. There needs to be a well-understood strategic game-plan that business and the community can buy into, and there clearly isn’t at the moment,” Cunliffe said.

“We’ll eat our hat if we can’t get the growth rate up above current projections.

“And would there be a revenue response? We wouldn’t rule that out, of some kind. We have ruled out an earthquake levy as such, but on the other hand we’ve ruled in raising the top tax rate to some extent above a threshold that’s quite well into six figures,” Cunliffe said.

“So yes, there will be a partial revenue response, and we think frankly that it’s irresponsible to load it all up on spending cuts and debt, and not to look to a growth plan, or any revenue contribution,” he said.

“So it’s a question of balance versus extreme.”

See attached a Double Shot Interview with Cunliffe recorded on Monday with Bernard Hickey, in which he is less specific about possible options for spending and tax, but also commented on the government's broadband progress.