Labour's policy better be good to gain votes

PATTRICK SMELLIE
Last updated 05:00 23/01/2014

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OPINION: Labour's promise at the last election to remove GST from fresh fruit and vegetables and exempt the first $5,000 of earnings from income tax always had a certain appeal. It was the tax cut you offered without being the kind of tax cut a National Party would offer.

But it clearly wasn't enough to get the party over the line and onto the Treasury benches last time, and Labour's new leader, David Cunliffe, has decided it won't be enough this time either and he'd rather have the $1.5 billion of revenue to do something else.

So far, so fiscally responsible.

It's also an admission that both policies were almost more trouble than they were worth.

While taking 15 per cent off the cost of fresh produce might have been a boon for low income families and the elderly, it wouldn't have made a jot of difference to the price of all kinds of other staples, like milk, bread, cheese, pasta, Raro drink powder, tinned tomatoes, or for that matter, fresh meat.

It would also likely be of greatest benefit to those who can afford to buy the most food. It would have created a permanent accounting headache for both small and large food retailers, along with adding a cost to every other business of separating the bananas from the Mallowpuffs when preparing GST returns.

In a country of small business owners, whom Labour seeks to represent, it was always more trouble than it was worth.

Instead, Labour will keep the simple, low-compliance cost model for GST that has operated since its introduction in 1986.

Likewise, the $5000 income tax-free earnings threshold was a measure as favourable to the rich as the poor.

Just about anyone who pays income tax earns more than $5000 a year, so every single taxpayer would have benefited from the move, largely offsetting Labour's intention to raise the top income tax rate from 33 cents in the dollar to 39 cents anyway.

However, yesterday's announcement raises two particular problems for Cunliffe, both of which he might be expected to address in next Monday's State of the Nation address.

The first is that he's ditched two policies popular with low income earners in favour of tax policy purity. That looks like a small win for the ghost of Rogernomics. Cunliffe's backers in last year's left-led leadership change expect him to make good on slaying that ghost, not appeasing it.

Self-appointed keepers of Labour's historic flame may see this as an allegedly right-leaning and disloyal caucus tail wagging Cunliffe's dog.

And secondly, it lays Labour open to the charge that the change is no more than pork-barrelling with money that voters had expected to get back.

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The $1.5b of revenue freed up by the tax policy changes will be used, says Cunliffe, for "game-changing plans that will help New Zealanders who are being squeezed by the National Government's lopsided and unfair policies."

He's promising a policy mix "different from what you have heard from us before". Watch this space, but don't hold your breath. There aren't that many new policy ideas under the sun.

Meanwhile, Labour's flagship capital gains tax policy remains intact, exempting only the family home. That means that the most common source of personal capital gain would sit outside the regime, reducing its ability to dampen rampant house price inflation, but the policy appears to have become mainstream.

While it may not raise much revenue and will be a happy hunting-ground for accountants, New Zealand looks increasingly out of step by not having a capital gains tax. If its introduction were to encourage farmers to make money from their farms' commercial operations rather than capitalising future expected income into land prices, it might even be a good thing.

However, by giving itself a $1.5b kitty to play with, Labour has opened up a significant flank for election year attack by National. In effect, Labour is saying that rather than give you your tax money back by exempting fresh produce and the first $5000 of income, we'll decide how to spend it for you.

Whatever it proposes had better look attractive to the swinging, middle-of-the-road voters that Labour needs to bring its way this year if it's to have a hope of governing after the election. There are fiscal surpluses coming down the track again, which give all political parties room for largesse and manoeuvre.

While the promise of income tax cuts isn't as potent as it once was, given growing political concern about the social impacts of growing income inequality, they might still represent a powerful alternative, were National to swing that way. BusinessDesk

- © Fairfax NZ News

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