Mr Key – a paperboy in his youth – said he found out about the move at Cabinet on Monday and did not regret it despite the publicity.

He found out on Monday? After the Budget had gone to print? Definitely a game of blame Bill going on here. I imagine the conversation at Cabinet on Monday must have gone something like this, ” Ah, John, we’ve got this thing called the Budget on Thursday. Nothing much for you to worry about….”

But, wait, there’s more Mr Key goes on to say

A lot of people didn’t know they were entitled to them so they didn’t bother claiming. The amounts were fairly small and overall we have been trying to clean up the tax code

Yes, that’s right the amounts are “fairly small”, that is the point! It’s tax on children who earn less than $45 a week, of course the amounts are small. That’s why the credit is there, so they can get those very small amounts back.

And yes some people didn’t bother claiming, but obviously quite a few did given that the government gets $14 million out of this.

What a load of spin and nonsense for a piece of penny pinching from the pockets of paper boys and girls.

The IRDs current tax collection system was designed in the early nineties. It was effective for many years.  But it has become increasingly obvious that patches applied over recent years are a failing stopgap.  New Zealand needs real progress on a replacement system.

The Government has already written off millions of dollars after a failed attempt to rebuild the student loans component of the IRD online collection system.  Since then no progress, only bad news.  Earlier this year, it was revealed that the Government estimates a necessary IT rebuild of IRD’s whole tax collection structure will cost up to $1.5 billion dollars.

New Zealand is not unique in having a tax system.  Adapting successful systems used elsewhere is the logical approach to replacing our ailing IT infrastructure.  This problem has been on the horizon for some time.  It beggars belief that the Government has not yet outlined a convincing plan or timeline for the development of overdue IT solutions. 

Voluntary compliance with a transparent tax system is critical to the efficient and effective functioning of our society. 

Businesses rely upon our tax collection system working properly when they put their GST returns in.  They don’t have time to waste reentering data when systems go down.  We cannot afford to risk the patience of those citizens who wish to comply with their civic duty.

And testing the patience of businesses is not all that is at stake here. Our hospitals and schools rely upon a trustworthy tax-collection system.  The IRD must not be allowed to fail.

The Minister of Revenue has not put forward a credible timeline for the project, and it is becoming clear that the government is sitting on its hands whilst New Zealanders face the consequences of an IT time bomb.

Not good enough Minister.

Reading through the Minister’s related speech, I couldn’t help wondering about the symbolism of its delivery just one month short of the Titanic’s 100th anniversary.

According to its own publicity, the IRD tax policy work programme places emphasis on achieving efficiency and fairness in the system.  Worthy objectives indeed.  And much of the work in the programme is worthy – plugging holes, and trimming sails to align with competitors - where it is to our advantage so to do. 

But significant change appears to have been ruled out once more. A Capital Gains Tax that would push investment towards the productive sector, for example, will not be considered.  The current tax system watches on as the Government shuffles deck chairs and sails towards a $12 Billion deficit.  This is crazy.  If you don’t change anything, nothing will change.

Our current tax system is in need of a serious overhaul.  The tax policy work programme looks a bit like an exercise regime for a thoroughbred nearing a big race – light and steady.  This would be fine if we owned a thoroughbred.  We don’t.  The Minister is refusing to admit his existentially-challenged Clydesdale needs anything more than a good make-over and a stiff crack of his whip.

The fiscal hole is getting bigger and the Government has no credible plan to address it. In my earlier post, I asked how the Minister of Finance could continue to credibly claim tax changes implemented under his watch were ‘broadly revenue neutral’ – when the Government’s own officials say otherwise.  IRD officials have said that 2.5 percentage points of a 4% drop in revenue were due to Government policy changes. 

We need jobs and a plan to address the structural issues that underlie our current account deficit. Tinkering with finer points in the tax system and changing who owns what through asset sales doesn’t begin to address the serious issues facing our economy.  New Zealand debt is set to continue climbing under National.

On the matter of economic policy and tax settings: no amount of deck-chair shuffling will change things - if the ship remains set on the same course.

This is an outrageous claim.  It was nowhere near revenue neutral.

According to the IRD’s 2011 Briefing to the Incoming Minister (BIM), Government tax-take dropped from 35.1% of GDP to 31% of GDP during National’s first term.  In a time of high borrowing, and a projected $12 Billion deficit, a drop in the tax base of more than 10% is plain irresponsible. Falling revenue means we don’t have the funds to support our schools and hospitals.  Either that, or we have to borrow to fund them.  This ain’t good.

The ‘broadly revenue neutral’ claim has been relegated to the status of a bad joke by the honesty of the Government’s own tax officials.  In their 2011 BIM, officials made clear that only about 1.5% could be blamed on the Global Financial Crisis.  About 2.5 percentage points of its 4% revenue drop can be directly explained by Government policy changes (ie the 2010 tax package).

To use the phrase ‘broadly revenue neutral’ in this context beggars belief.  It is an abuse of the English language.

How ‘broad’ can ‘broad’ get before it the Finance Minister will admit it is simply *not* revenue neutral?

Blaming the hole in the accounts on the Canterbury earthquakes or the Global Financial Crisis is no longer a credible excuse for the $12 billion deficit.

Though not widely reported, this drop in tax-take is big stuff.  It is likely to have wider consequences.  Sadly, it fits with the picture of a government bereft of a credible plan for managing our economy.

Tonight TV3 have gone one better and unearthed video footage of him speaking to the PSA Conference back in September 2008. Not only does John Key rule out asset sales, he makes a compelling case against them.

“There’ll be no asset sales in the first term of a National government, and there may never be asset sales in the years ahead… Nor am I hell-bent on selling assets actually. I personally think it’s not the issue that the current economy faces. In the world of making the boat go faster, actually I don’t think selling off state assets is going to make the boat go faster.

Labour has been arguing all along that asset sales will not make us a richer country. We’ve been consistent. John Key and the National government have done a complete u-turn and have now placed asset sales at the centre of their economic strategy.

“The Crown’s dividend streams from the Meridians, the Mighty Rivers of the world is large, so on both motivations we don’t have a debt problem, they’re acting, I think, highly effectively as companies, and they’re making money. There is no motivation to sell assets.

Once again, Key is borrowing the line that Labour has been consistently arguing for over a decade. The SOEs are highly profitable. They make more money than we would save in debt repayment costs if we sold them. Also note Key arguing we don’t have a debt problem (Bill English also made similar comments both before and after the 08 election). Interesting how after 3 years of a National government debt seems to be the biggest issue we face…

“So there’s no agenda to sell assets.

This is perhaps the most damning quote. Although Key was careful before the 2008 election to qualify his no asset sales pledge with “during the first term” he gave New Zealanders the very clear impression that he wouldn’t be selling assets long-term either.

“What we are saying is we’re not going to cut jobs, we’re simply capping at 36,000.

That commitment didn’t even last a term. Now he’s promising even more job losses during National’s second term. Nothing about that in their manifesto for 2011.

“The second point is, no we’re not borrowing for tax cuts.

So if they’re not borrowing for tax cuts, and New Zealand didn’t have a debt problem when they took office, why are they now arguing we have a major debt problem and need to sell assets to fix it?

John Key has built his political career on telling people what they want to hear. Eventually that strategy always catches up with people, and it’s catching up with Key big-time.

The facts:
NZ is the third fattest country in the OECD (astounding). The productivity and health costs associated with this are huge – and growing.
Auckland University and Otago University medical schools undertook a joint research project into ways to influence consumer behaviour around the purchase healthy foods. Three groups were set up; 1) control group, 2) a group given very targeted information and education about the outcomes of healthy purchases, and 3) a group that were given information and a 12.5% price discount. The result: no change from control group (expected), no change from the group given a high level of education and information only (surprising), however, a 11% increase in the purchase of healthy food by those who received a 12.5% discount.

After consultation with a lead member of this research team, we decided that one of the best ways to influence buyer behaviour and promote healthy choices was provide a price incentive. This works. Six months after the study had finished and prices returned to normal for the third group, the researchers found the majority in this group were still making healthy purchase decisions.

So, education alone will not work in changing the eating habits / purchase decisions of the vast majority of NZers. A price incentive does. If anyone has a more effective way to directly target the obesity problem then I am very interested in hearing, because while it is a problem now, it is set to become an epidemic within a short space of time.

As an aside, we did briefly consider a ‘fat tax’ on unhealthy foods, however, ‘unhealthy’ is very difficult to define (under many definitions, milk and cheese are ‘unhealthy’) and so we decided that in this case, it is easier to remove a tax than add one.

An interesting contribution to that debate in New Zealand is coming from Gareth Morgan and Susan Guthrie. Their latest piece appeared in the NZ Herald on-line today.

Morgan and Guthrie highlight the obsession with property speculation, the reliance on commodity prices to keep us afloat, a narrowly based economy and monetary policy and a tax system that fuels the worst of speculative behaviour. These are not new messages from Gareth, but there is more reasonance as we look at a global and national economy defiantly not recovering and staggering (or is that muddling) through the year. He puts it this way

There is a naive single dimension to our economic policy – we either raise or reduce the budget deficit or we raise or reduce interest rates. That’s the sum total of the intellectual capital being applied to managing our economy. That it could be so bereft for so long has led to the persistence of our “structural imbalance”. There is a chronic need for policy enlightenment and a sweeping aside of a simplistic policy orthodoxy that has been rigidly paid homage to for 30 years now.

Now, of course I don’t agree with all of their prescription, but the idea that we have to change the way we think about our economy is the core message, and it is one that Labour has heard and taken on board. We are offering a different way of doing things both from where the current government is, and where we have been.

Monetary Policy. Labour has already announced that we need to change monetary policy to address the structural issues in the economy, including the volatility of the dollar that makes life difficult for exporters and high interest rates that discourage investment in productive parts of the economy. While curbing inflation remains important, having that as the single focus is not working for us. Our policy is to broaden the objectives of the Reserve Bank beyond just controlling inflation to look other issues, such as employment and to support more aggressive interventions to deal with currency speculation.

Fairer Tax System. As noted we are going to introduce a Capital Gains Tax to ensure we tax income in all its forms and start to move toward investment in our productive economy. We also are going to return the top tax rate to 39c over $150,000, the first $5000 tax free and taking the GST of fresh fruit and vegetables

Procurement/Overseas Investment. Labour is going to make important changes to focus to support our own economy. This means new rules on government procurement, that will be compliant with our international ageements, but will require a process that gives Kiwi firms a fair go and will look at a wider set of criteria for awarding contracts including the impact on the domestic economy. We want overseas investment but as announced in 2010 we will put stricter controls on purchases of farm land, monopoly infrastructure, so that we keep control of our assets (and of course there will be no asset sales!).

And there is more to come in terms of innovation and economic development, to build on the R and D Tax Credits, Youth Employment. And more to come in Savings, where we really can build a basis for creating the pool of resources to invest in our own companies, just as Kiwisaver funds have done with Scott Technology.

This post is too long already, so I will come back to some of the social policy issues Morgan and Guthrie raise, but for now I am confident that Labour has a different vision on offer this year. Some of it is policy we have done before, but a lot of it is thinking differently, because as they say a definition of madness is doing the same thing over and over and expecting a different result.

I have written an op-ed for the Herald on why the “Ratings Ref” yellow carded NZ.  Standard and Poors and Fitch agree on what is fundamentally wrong.  They say:

• First “very high external imbalances, accompanied by high household and agriculture sector debt” (S&P). These are mainly house and farm mortgages borrowed through the banks from foreign lenders to fuel our property obsession.
  • That’s not a new problem and it has levelled off a bit with the recession. But it is at historically high levels and makes New Zealand “an outlier among peers” according to Fitch.
• Second, “dependence on commodity income” says S&P.  Despite record milk prices we are still not paying our way in the world.  The current account deficit is a long term issue. But it will worsen to 6.9% of GDP while the Net International Investment Deficit (NIID) will grow from 78% to 85% over the next five years.
• Third “emerging fiscal pressures associated with (our) aging population” (S&P), including health and superannuation.  Suspending the NZ Super Fund pre funding hasn’t helped.

The reaction from Bill English on Q & A yesterday was uttlerly inadequate.  He maintains the government will keep on doing what it is doing.  As if that has done any good so far  – $37 billion extra debt, 47,000 more unemployed and 3.6% lower GDP now than when they were elected.

Here is the Government’s spin, and some perspective on it:

• “We have worked hard to control government spending and succeeded”.  The problem is that some $37 billion of debt has been added since the National Government took office – some $18 billion in this year alone.  While nobody blames any government for earthquakes – and the ratings agencies recognise that both sides of the political spectrum are exercising fiscal restraint, this is not enough to avoid a downgrade.   The agencies’ arenot swayed by the prospect of liquidating $5 billion of SOE assets.
• “We are better placed than some other countries”.   Being “better placed” than Iceland, Greece or Portugal is cold comfort.  Nor is it sufficient, in the face of paralysis in the US and chaos in Europe, to take refuge in Chinese and Australian expansion.  The risks of a slowdown in both economies are significant, and s the ratings agencies demand New Zealand  takes responsibility for its own future.
• “We are still on track for surplus in 2014-15.  So she’ll be right”.   As if.  The precise timing of short term fiscal balance is not the issue that has worried the ratings agencies.  The long term deterioration driven by poor savings performance, weak exports and the mountain of real estate debt is.  Clutching at such irrelevant straws only highlights the absence of better ideas. 

Proof of the bankruptcy of National’s ideas is in this sobering fact:  only one quarter of OECD countries have been downgraded by Fitch in the last three years.  The last time this happened to NZ was in 1998.  It is nonsense to say we are riding the waves better than most.  To the contrary New Zealand is highly exposed, and saddled with a government that has no plan.

Labour has the policies and the political courage to make a difference and to do what is needed: capital gains tax, strong saving policy, monetary reform and strategic economic development.  It is vital that we implement them before it is too late.

Be in no doubt: what happened on Friday is a very serious development that will have repercussions for many years.  I will write further on what this means for the average Kiwi family.

Aside from the obvious contradiction there (‘not trying to please people… but about creating a system that people feel is fundamentally fair’: in my experience, people are pleased with a fair system, and not with one that isn’t), I don’t think anyone would disagree with the sentiment. As Revenue spokesman, I get many e-mails from people who believe they are being ‘ripped off’ by a discriminatory child support regime.

Three points I would make however:
1. Two and a half years ago Dunne said he would complete a review of the system in 6 months. What took him so long?
2. Dunne’s IRD is undertaking a round of redundancies (16 front line staff in Napier alone) and yet they are about to restructure the child support system… Does that mean ‘more with less’? Give me a break.!
3. Most importantly, Dunne has said that the changes to the system will be in legislation introduced to Parliament in the next few months. There are only four sitting weeks left this term. This is incredibly important legislation because over 200,000 NZ children rely on child support payments. I hope like hell this isn’t something that Dunne and the Nats are planning to introduce under urgency.

I am not saying there doesn’t need to be changes to the child support system, because there quite obviously does (of the approximately $2b in child support debt, under $200m is actually principle). But any legislation reforming the child support system needs to go through the proper parliamentary process; e.g. public select committee where all NZers can have their say.

The real shame of all this: if Dunne had done what he said he would do, then we would have had this whole system reformed months ago. Wonder why he hasn’t…