Can Key's grin save him from troubled waters?

BY VERNON SMALL

OPINION: It was John Key's smile that said it really.

Not the relaxed confident grin he usually adopts at media events, but something tenser, less natural. More teeth. Almost false.

He was at the time hosting a joint press conference with Education Minister Anne Tolley to announce a charm offensive (paid for by the taxpayer) and a counterattack on teachers over national standards – all to sell a policy that the polls say is popular but which he clearly thinks is not being "sold" well. Mrs Tolley, beware.

The press conference was one of the clearest signs yet that this is National's year of living dangerously, and Mr Key knows it; the middle year of the term when tough decisions have to made, and when an economic programme has to be put in place to deliver – or at least take the credit for – a step change in economic growth.

A year when ACT leader Rodney Hide's cutting criticism about Mr Key and his "do nothing" approach is either put to rest or bedded in. A year when unemployment should peak, but the threat of a second recession will never be far away.

Mr Key's flagship speech opening Parliament on Tuesday is being kept under tight wraps, with few of the hints and pre-event briefings to till the soil before the seeds are sown.

But it should show us for the first time how radical the Government's programme will be, and there are far higher hurdles ahead than selling national standards.

Top of the list for Mr Key is a response to the Tax Working Group's call for extensive reform. Over at Treasury the talk is all tax, tax, tax, and Inland Revenue's mandarins have also been hammering their calculators.

It all suggests something more substantive is in train than the fallback option of merely teasing the public by ruling out some of the less palatable choices.

The signals have so far been confusing and Mr Key has looked more enthusiastic than Finance Minister Bill English, although his office insists there is no substance to that impression.

One of Mr English's clearest steers has been that New Zealand may get in first with a cut to the 30 per cent corporate tax rate before Australia lowers its matching rate. If he is serious, then the goal of aligning the top personal, trust and company rates at 30 per cent may be off the table. (Aligning all the rates at a lower level than 30 per cent would knock a big hole in the Government's revenue.)

This week Mr English also semaphored moves to stop current middle-income earners moving on to the top tax rate – though apparently those concerns evaporate if that rate is lower than the current 38 per cent.

The minimum Mr Key is likely to announce is a cut in the top personal rate to 33 per cent – effectively wiping out the top rate imposed by Labour in 1999 – which would put it at the same level as the rate charged on trusts and remove at a stroke most of the incentive to shelter income in them.

On the other side of the ledger, the cash to pay for the cuts can most easily be found by removing depreciation on investment properties.

Bigger shifts would need either a rise in GST – which the Government finds strangely alluring and would not be a complete surprise (and Labour's Phil Goff is on his knees praying for) – or a land tax. Despite the latter's simplicity, there is a real reluctance to muscle in on local government's revenue base, so it will probably not feature in Mr Key's plans.

However, even the politically most saleable option – an end to depreciation on rental properties to help push cash into other sectors – is not without its political risks.

The Government believes there is a general acceptance even among investors in the sector that "the game is up", but Labour MP Rick Barker, in a blog post this week, thinks it is still a raw nerve.

Mr Barker tells the tale of one of his mates who is worried. "He left school and got a trade, he is still on the tools, and after 30 years has paid off his house. He rides a good second-hand Harley, not new, has a five-year-old Jap import for a car, so there is nothing excessive there, but he is concerned."

He was told to save for his retirement, but the 1987 stock market crash made him nervous about investing there and he is thankful he stayed away from finance companies

"This man is no bludger, no rack-rent landlord, he is not highly leveraged, gambling on capital gain to offset other costs, he is a hard-working Kiwi and a saver. He has done what was asked of him and now he fears that he is to be punished somehow for doing the right thing, saving prudently."

It is a timely warning to Mr Key and his Government that what makes sense at a macro-economic level is also about a whole lot of individuals and mum and dad investors who can easily get offside.

Other decisions pending have the potential to do the same.

A discussion document on extracting minerals from conservation land is wending its way through the Cabinet committee process and will rate a mention in Mr Key's speech.

The Maori Party's Whanau Ora policy, giving community providers access to cash for social services, is a potential time bomb that is being partially defused by opening the policy to all groups, not just Maori.

Of course, you have to predicate any dire predictions with the acknowledgment that Mr Key and his Government are enjoying stellar ratings and a honeymoon that should by rights have exhausted many voters already. So there is plenty of political capital for National to burn.

Nevertheless, it is one of the cruel ironies of politics that, while doing nothing is corrosive, political actions accumulate enemies like iron filings to a magnet.

This is the year when we discover whether Mr Key is not just Teflon-coated, but rust-proof too. That he can not only grin, but bear it as well.

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