Labour's no-change tax stance could spell danger for fundamental overhaul enthusiasts if it gains momentum, Alex Tarrant says

By Alex Tarrant

Labour Party leader Andrew Little garnered a bunch of attention over the past few days by saying Labour would not take any tax changes into the 2017 election.

While a cracking headline, the comment needs to be read in conjunction with previous statements, and caveats given by Little on Saturday and finance spokesman Grant Robertson on Monday morning.

One massive get-out clause is that Labour will wait and see what Finance Minister Steven Joyce says in his 25 May budget on government revenue projections and potential tax cuts from the governing National Party.

Another aspect is that Green Party could demand changes not proposed by Labour, but which the party might feel alright about going through with after the election if it can deflect to its junior coalition partner.

No tax changes

Little on Saturday told TV3’s The Nation that Labour was not going to enter into a conversation on tax rates, because it first needed to see the Budget. But he did say voters would know what Labour’s tax rate proposals were going to be before the election.

He then dropped the comments that everybody picked up on:

We're not planning on raising taxes and we're going to see what the Government talks about, you know, in its tax changes that it's foreshadowed, but we are making no plan for lifting taxes…

We are not planning on any tax changes for the 2017 election. We will finely calibrate what we do once we see what the Government does in its foreshadowed tax changes, which we assume will be in this year's budget, but who knows?

The comments follow indications made by Little since he became leader that Labour would not run on a strong tax ticket in 2017. By announcing early on that the party would not propose a capital gains tax for its first term in government, Little was effectively saying any big tax moves would be taken into the 2020 campaign.

But the fact he has now ruled out running on any tax change policies at all (Budget-dependent) does raise a few questions. His claim that Labour could fund its spending promises with the existing tax settings could be knocked back as Treasury updates its Kaikoura quake cost estimates.

What happened to extra revenue steps to be announced this year?

Labour finance spokesman Grant Robertson last year raised the prospect of Labour heading into the 2017 election with extra policies on the revenue side. In his pre-budget speech in May 2016, Robertson said:

While we want a comprehensive review there will be some interim steps that we will announce before the election in this regard to ensure that we have the revenue to address pressing issues, particularly in health, education and housing.

That's pretty clear in suggesting Labour was looking at taking some smaller-fry tax changes into the 2017 Election. Then Robertson would be allowed to launch his comprehensive review into rebalancing New Zealand's tax settings after that, which would lead to heftier proposals to take into 2020.

But do Little’s Saturday comments lock Robertson out of being able to announce more palatable tax changes than capital gains and land taxes that could be used to help fund Election 2017 policies?

Little was adamant Saturday that “every commitment that we've made under my leadership we can pay for out of existing tax revenue.” He referred to the government’s improving revenue projections as providing cover for not needing to hike the top income tax rate to pay for policies.

This is true to an extent. Treasury’s monthly reports show the government’s operating balance in the seven months to 31 January was a surplus of $1.145bn – much higher than the forecast of $442m.

However, this came with the massive caveat that Crown expenses stemming from the Kaikoura Earthquakes had yet to be quantified, and so were not included in the accounts. Initial estimates from Treasury were that the quakes could cost the government $2bn-$3bn.

That could certainly rain on Labour’s parade, and is possibly one reason for Little's Budget get-out clause.

Robertson on Monday morning said Little’s ‘no tax change’ stance did not refer to the existing Labour policy to extend the bright line test (effectively a partial capital gains tax on housing) out to five years if it wins the election.

And Little himself has kept a bit of dry tax-change powder for if Finance Minister Steven Joyce announces the government will change income tax settings to cover for account bracket creep. The Labour leader even said on Saturday that tax thresholds should change periodically.

May have to eat his Greens

Meanwhile, the Green Party also looms large over Little’s ‘no tax change’ comments. Co-leader James Shaw told Interest.co.nz the Greens agree with Robertson that there needs to be a fundamental shift in New Zealand’s tax settings. They’d just like to see it come earlier than in the 2020 Parliamentary term.

“Every party has to compromise on stuff,” he said. “We’re setting out our stall, they’re setting out theirs.” The matter of tax change urgency looks set to be dictated by how many MPs Shaw and co-leader Metiria Turei get in the door behind them on 23 September.

Labour and the Greens are set in the next few weeks to outline a bunch of fiscal ‘golden rules’ that will govern how they operate in government together. But Interest.co.nz understands these are set to be more high-level promises such as, ‘we will not let net government debt go higher than X% of GDP under our watch, unless there’s a natural disaster’, rather than on more micro fiscal settings like tax rates.

Danger that Little's stance gains momentum

We have to assume that Little’s comment that Labour was looking to run with a ‘no tax change’ policy was calculated and planned, just as he was quick to drop Labour’s commitment to a more comprehensive capital gains tax.

The danger for those holding out hope for fundamental tax reform in New Zealand is that he sees his party pick up momentum with a simplistic no-change stance and watches the Green vote get hit by their calls to tax housing and other forms of wealth much more extensively. That could put Robertson’s “fundamental” overhaul plans very much on the backburner.