A Key speech for National

Let's play a little game shall we? Let's try to guess what's going to be in Prime Minister John Key's speech at the opening of Parliament tomorrow.

I admit I'm a bit late off the mark with this. Labour leader Phil Goff has already started, releasing a speech to the Sunday Star-Times that he claims he will deliver tomorrow. In it, he puts himself in the shoes of the PM and says what he would do.

It's a ballsy idea, fraught with risk. If he doesn't deliver it with precisely the right tone - i.e. ironic - he's going to come across as a bit of an egg, frankly. Goff isn't the PM, and people might be either confused or annoyed at his pretence.

Also I think his prescription is unlikely to be offered up by Key tomorrow. The PM ain't going to scrap national standards, raise the minimum wage, change benefit abatement rates, introduce retraining allowances, or change monetary policy.

So what will he do? What should he do? We all know what the problem is, and most people seem to agree on it: low productivity, poor wages, slow economic growth, only average standard of living, growing gap with Australia, boom and bust housing market, poor savings record, high overseas debt and exchange rate.

"Fixing'' the problem is where opinion diverges. Labour reckons that pumping up wages through a boost in the minimum wage and more interventionist government is the right approach. National has gone the interventionist route over the past year, but is now leaning towards returning to a more individualistic, market approach.

So as Key puts the finishing touches to tomorrow's speech, there's no shortage of advice for him. The Tax Working Group reckons he should raise GST to 15 per cent, close property tax loopholes, introduce a land tax, and cut the top tax rate.

Don Brash's 2025 taskforce thinks he should do all of those things but also slash social spending as well.

Reserve Bank governor Alan Bollard has also chimed in, reminding Key that the middle class in New Zealand pays most of the tax, and that's "unusual'' among OECD countries. He also wants fewer tax incentives in the property area, since it makes it more difficult for the Reserve Bank to control inflation without pumping up interest rates to the extent that they push up the exchange rate.

I understand some of Key's Cabinet were less keen, particular around raising GST and socking their property developer mates. The problem, though, is that to make everything largely fiscally neutral there are just going to have to be winners and losers.

Key's been doing the Dance of the Seven Veils over his intentions, and of course it's always possible we'll be none the wiser tomorrow anyway. But given the number of hints he's dropped now that tomorrow's speech is going to be substantive rather than big picture, he risks failing to meet expectations if there isn't at least a little sizzle with the sausage.

On radio this morning, Key said:

''[The public] will be able to see where we are going, what we are doing. We will tackle some of the bigger issues like tax. You can expect in there to see our response to the Tax Working Group to give New Zealanders an indication of where we may or may not go. We will be reasonably specific. I don't think you will come away from the speech wondering what we are saying.''

He added that the tax system had been favouring those with rental property:

''There are hundreds of hundreds of thousands of Kiwis then who are paying for you to drive on the roads, for you to access the health system, for you to have superannuation in your retirement, for you to educate your kids. That's not fair and a lot of those people are low- to middle-income New Zealanders so I am just trying to put a bit of balance in the economy.''

So I think we can safely assume that property investors are not going to be the winners from tomorrow's speech. How Key plans to address this area is the issue. He could introduce a capital gains tax, or a land tax, or tinker with the rules around loss-making properties that allow investors to lower their taxable income.

Personally I reckon Key will go for a mix that doesn't allow Labour to claim National is introducing a new "tax'' - in other words, toughening existing regulations and closing loopholes.

On tax, it's now pretty clear National wants to move ahead with cuts to the top tax rate. The only question is when, and by how much. My money's on a reduction beginning in election year, probably a couple of cents, lowering to 33c over time.

That leaves two problems: how to pay for it, and what to offer lower-income earners so they are not left out. The property tax changes will probably cover the top tax rate cut, but not deeper and more expensive cuts further down the income scale. That would probably require a rise in GST.

GST is the biggest unknown. Key and Bill English are known to be tempted by the idea of raising it. It's simple, reasonably easy to do and would pull in a substantial amount of money for the Crown - roughly $700 million for every percentage point rise.

BUT - and it's a big BUT - there are problems as well. First, National would have to compensate lower-income earners and beneficiaries and pensioners for any GST hike, which would be administratively complex and would remove much of the increase in tax revenue.

Then there's the political ramifications. It's difficult to see how the Maori Party could vote for a rise in GST, no matter how much compensation was offered. That's a problem, since their supply and confidence agreement binds them to vote with the Government on all budget measures.

Second, Labour would have a field day. It's not going too far to say Phil Goff will be saying his prayers before he brushes his teeth tonight: "Please John, announce a GST rise. Make my day.''

Yes, I know, Labour introduced GST and then raised it, and got away with it too. But times have changed. Labour also slashed taxes and offered massive compensation when it introduced GST. And the economy wasn't in recession at the time either.

I think it would be a huge call for National, the party of lower tax, to raise GST, no matter how much economic sense it makes. The amount of money it would raise would be outweighed, in my opinion, by the public backlash.

Still, Key has promised a "step change'' in the economy this year, and raising GST is certainly that. There are other bold moves he could make, however, without throwing Labour such a bone to happily chew on.

Whatever he announces, tomorrow's a big day for Key. It's probably the most important speech he's yet made in his time in Parliament. With the economy swinging out of recession, now's the time for him to come good on his promise to raise the country's living standards - or at least outline how he plans to do it.

Platitudes about cutting red tape, rolling out broadband and tinkering with the RMA will no longer be enough, and Key knows this.

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