How macho will the Govt be is the question intriguing political circles in Wellington, as John Key’s administration lays the foundation for structural changes it says are essential in closing the income gap with Aust. Some of those in Cabinet, (even those who concede this year’s budget will be a defining document for the Key-led coalition) say the changes can’t be wholesale, random, or destabilising. But others contend reforms must be radical if there is to be a sharp (and visible) improvement in economic performance.

National Party focus groups are reflecting the expectation the Govt will attempt something bold and strategic. This leaves little excuse for those who think only what is needed for re-election is to simply market the popularity of the PM.
The Tax Working Group, with its careful analysis of a tax system which “is broken” has added to pressure for reform. The fiscal outlook is bleak, with overseas liabilities greater than they have ever been. The message is clear. The Govt needs to pull some significant levers. The PM has repeatedly said he wants a “world-class tax system.” The difficulty he is making for himself is the more he rules out (such as a capital gains tax or a land tax), the smaller the impact will be on economic performance. Finance Minister Bill English says the Govt must weigh up the economic impact of changes to the tax structure, rather than just making it fairer and more equitable.

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Central to the debate in Cabinet will be an increase in GST. A rise to 15% could yield an extra $2bn in revenue in order to lower the top income tax rate, but after compensating beneficiaries and low income groups, the Tax Working Group thought the gain could be just $200m. But the dynamic effects could be transformational, increasing incentives for work, investment and savings, lowering those for consumption and borrowing. Cabinet will have to balance those dynamic economic effects against the political downside.

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