Editorial: Boldness lacking

Prime Minister John Key's formal Statement to Parliament had been billed as the most important speech of his political career. It was not.

That speech will surely be delivered during next year's election. Then he will be campaigning on his economic policy, including the direction he unveiled in yesterday's surprisingly modest speech.

Key had the opportunity to announce a major broadening of the tax base, as suggested by the recent Tax Working Group, which could have had the beneficial effect of encouraging investment and savings rather than property and consumption.

But he shied away from favouring new measures such as a capital gains tax, a land tax or the risk-free return method for taxing residential property investments. Key cited a variety of practical reasons for this, but left unsaid that these mechanisms would have been opposed by sections of National's business and farming constituencies.

Nor, surprisingly, did Key address the issue of company tax. Instead he picked up on the working group's suggestion of increasing GST from 12.5 per cent to 15 per cent. He said that the Government is carefully considering this "modest" rise – although many struggling New Zealanders would dispute that this would be modest.

A rise in GST would contain political risk for National as it creates a strong point of difference with Labour, which believes an increase would impact disproportionately on the lower paid. Key attempted to limit the potential for criticism by quickly saying that a rise in GST would have to be accompanied by across-the-board personal tax cuts and welfare payment increases. And the GST change would not occur unless most New Zealanders were better off.

But until precise numbers are announced in the Budget, it will be unclear how fully any GST rise would be offset by personal tax and benefit changes. Many New Zealanders would also be more focused on rising food and petrol prices than on how much their take-home pay had risen.

And if the Reserve Bank does increase interest rates later this year, this will be another call on the tax savings of many homeowners, which would compound dissatisfaction with a GST rise.

Nor is it yet clear whether the move would encourage, especially among struggling lower income families, saving rather than consumption, which would be an aim of the fiscal shift. Besides, the biggest beneficiaries of personal tax cuts would be higher income earners because most of them pay more tax at present. This will be another image for Labour to exploit. Less controversial will be closing tax loopholes which allow some families on higher incomes to qualify for Working for Families and some property investors to effectively pay no tax.

Key's statement, much of which had been signalled previously, was what is often termed "aspirational". But one key aspiration for the Government is to disprove Reserve Bank Governor Alan Bollard's comment that it was unrealistic to expect this country to catch up to Australia economically.

It is all very well to aspire to achieve this, but yesterday's speech did not inspire confidence that the Government has developed the bold and innovative policy tools to allow us to match our trans-Tasman neighbour.

The Press