Disappointing tax plan for top 20

Voters awaiting National's grand plan for managing the effects of the global financial crisis will be disappointed in the tax and economic package released today by opposition leader John Key and finance spokesman Bill English.

There was good news for about 80 per cent of tax payers - significantly more money in their pockets when the first raft of National's tax cut kick in next April.

There was good news, too, for those earning between $24,000 and $48,000 - a special rebate of $10 a week for people currently shut out of Working for Families.

People who currently can't afford to pay 4 per cent of their salaries into Kiwisaver can now join with only 2 per cent. This is a plus but any Muldoon-style tinkering with savings schemes once they're in place engender fear and uncertainty among voters.

Not so happy will be employers who will lose the tax credit, up to $1040 a year, that the government pays directly to employers to match the compulsory contributions they are required to make.

Superannuitants will get a raise.

But despite Key's description the current crisis as a "loud wake-up call", there was no sign of any overall strategy for dealing with the effects on New Zealanders of the increasingly likely meltdown in US financial markets, and of the banking collapses across Europe and America.

Among the most glaring practical omissions was National's lack of movement towards bank deposit insurance - a way of protecting the cash the public keeps in its bank accounts.

New Zealand and Australia are the only western countries not to have such a system. Asked today how quickly he could put such a scheme in place, Key said he'd have to "talk to the Australians". It did not sound like any time soon.

Cullen, too, has dodged this issue. Asked the same question earlier this week, he said talks had begun but he didn't want to introduce deposit insurance right now because people might then think there was a problem, and there wasn't.

Exactly what planet is this man living on? Our banking system might be sound, as we've repeatedly told, but as The Economist notes this week, between September 28 and 30 governments on both sides of the Atlantic shored up or split up six banks threatened by failure.

Why do our politicians think New Zealand is immune? And are we sure we know everything we need to know about the financial dealings of the Australian parent companies of our banks?

All up, 98 countries have deposit insurance. Ireland this week went so far as to guarantee the deposits in its six largest banks

Both American presidential candidates have promised to lift the ceiling on bank deposit insurance from $US100,000 to $US250,000. Along with cash protection, it is seen as a way of calming the public and convincing them their money is safe. This, in turn, prevents a dangerous run on the entire banking system.

Key and Cullen have agreed on one thing, at least: that Kiwi earning more than $70,000 can be defined as "rich".

The upper echelon of income earners - the $70,000-plus bracket for both National and Labour - are the biggest losers in today's tax cuts.

National has pared back the marginal tax rate for top earners down from 39 per cent to 38 per cent - considerably less generous than was expected - but hopes to lower this to 37 per cent in 2010.

A new 12.5 per cent rate has been added for those earning up to $14,000 a year while those between $48,000 and $70,000 will pay the company tax rate of 33 per cent.

Key and English say they have shaved nearly $2 billion from their $15 billion tax and economic package since Monday's pre-election opening of the books showed New Zealand would run its accounts into the red for the next 10 years. Cullen, Key said, had been a "fair-weather finance minister" and his legacy would become known as the "decade of deficits".

"New Zealanders woke up last Monday morning and realized how hopeless he had been."

During the past few days, the casualties have been upper income earners, and those receiving research and development credits which will be scrapped under an incoming National government.

Key says cutting R & D credits will save $283 million over the next three years. This, plus changes to Kiwsaver, means National will not have to borrow or cut public services to fund its personal tax cuts program.

Asked about the likely effects on productivity of cutting R & D spending, Key said most of it was "reclassificiation of expenditure that's already happening". He said there was "lots of rorting of the system going on" and "accountants are running from one end of the country trying to reclassify things".

But others believe he is dead wrong..

Jo Doolan, a tax partner at Ernst & Young, says she is "gutted" at Key's overall package, saying she's hoping it's a policy of political expediency to get National elected, rather than what its might actually do in office.

"The whole thing is hurried and ill-conceived," Doolan says. "Top earners don't need tax cuts when people are struggling and times are tough. When you introduce a big change like Kiwisaver, you don't tamper with it. We need to develop a savings culture and this sort of thing doesn't help. People need certainty."

Doolan says she suspects behind the package is political one-upmanship - that Key and English were determined to outdo Cullen by producing a self-funding tax cut package, no matter what damage might be done in the process.

The R & D cut is another sore point.

"People do spend on R & D," Doolan says. "The whole aim is to focus on R & D and improve productivity. What little growth we've had in the past few years has come from growth in the labour market. If we're going to grow and improve, the only way is by improving manufacturing processes, better software development, being environmentally friendly - things like that. That's where anyone with any vision would want to go."

She says Key has missed a golden opportunity to show New Zealand some leadership. As she sees it, he just blew it.

"Either we're part of the global world or we're not."

Had she been in Key's shoes, Doolan says she would have scrapped personal tax cuts when the depth and extent of the deficit became clear on Monday.

She would have introduced bank deposit insurance immediately on getting into office, given the Reserve Bank governor more flexibility by removing the 3 per cent cap on inflation, and slashed interest rates by 1 per cent.

"Strong leadership in a time of crisis is what people are looking for, even if the answer is no. Instead, National is playing to the public. If this is a true reflection of what it stands for, then I fear for the future of this country." 

- © Fairfax NZ News