When she was campaigning to be Minister of Finance last year, Nicola Willis pledged that she would resign from the job if she failed to deliver tax cuts in her first Budget. Now, it’s that pledge, along with Prime Minister Christopher Luxon’s pride, that seem to be the only reasons that the National-led Government is continuing to promise tax cuts in the face of opposition from just about every economist and political commentator from across the political spectrum.
Outside of the Beehive, there’s an almost total consensus that it would be crazy to push through tax cuts at the moment.
An urgent campaign has been building to persuade the new Government to ditch this year’s tax cuts. This isn’t just being organised from the Opposition benches, the CTU, or the media. It’s also coming from within the Beehive itself, and within National and other parts of the political right.
The campaign against tax cuts from the political right
The first major salvo in the campaign to cancel the promised tax cuts for 2024 came from the Deputy Prime Minister. Winston Peters gave his remarkable State of the Nation speech last weekend, which included the unprecedented critique by a Deputy PM of his own Government’s upcoming Budget plans. Peters signalled that there was a fiscal hole of $5.6b in National’s figures for the Budget and that he couldn’t see how Willis was going to fix it or be able to deliver tax cuts without borrowing, introducing new taxes, or making unacceptable spending cuts.
Former National leaders, staffers and activists are also starting to send strong signals to Luxon and Willis that they need to quickly U-turn on tax cuts. The most interesting instance of this was Fran O’Sullivan’s column in the Weekend Herald on Saturday which reported on former National Prime Minister John Key meeting Luxon recently for breakfast and urging him to pull back – see: Tax cuts: Luxon needs to take long view, revisit plan (paywalled)
O’Sullivan, who is closely connected with the Auckland business community and people like Key, reports on the former PM’s message to Luxon: “Key strongly believes a new prime minister should think about delivering a political change programme by taking a three-term view, not a three-year view. They should assume – if successful – a prime minister or their party will have nine years to deliver a considered change programme rather than trying to cram all their spending cuts and policy changes into three years (and going too hard in the first year), risking plunging the country into so much discontent their programme has to be abandoned and they don’t get re-elected. It is vital to secure trust in that first year in office.”
Her own view also appears to be strongly against the tax cuts and big spending cuts, with O’Sullivan saying: “the Government’s books really do need to be knocked into shape before they dish out a programme of inflationary tax cuts” and “The rational choice would be to wait for revenues to restore and park the tax cuts until we can afford them.”
Commenting on O’Sullivan’s column today, financial journalist Bernard Hickey says: “It’s clear some of the grandees of the National Party are starting to get nervous about the ‘crash or crash through’ mentality that seems to have gripped PM Christopher Luxon’s coalition ahead of the Budget on May 30”. He points to the fact that Key and Bill English had also promised tax cuts when they won in 2008, but a few months into power they announced that these would be delayed and similarly that big cuts to expenditure wouldn’t occur.
Hickey says that Key and English “were wary ahead of their first Budget in 2009 of being painted as the ‘nasty’ party or trying to get too far ahead of the electorate. That’s why an initial plan for income tax cuts was suspended in early May 2009 for a Tax Working Group review” – see: Key fears Luxon is going too hard, too early (paywalled)
Many on the political right are bewildered by the Luxon-Willis determination to implement tax cuts in a time of austerity, recession, and budget deficits. One of these is political commentator and insider Matthew Hooton. As early as October last year, he was campaigning for the tax cuts to be ditched, pointing out they were only really driven by the National leader himself: “Luxon alone decided to proceed with National’s ludicrous tax ‘plan’, that was largely written by lobbyists, doesn’t add up and would cause higher inflation and higher interest rates than even Labour, despite the full benefits going to only 0.18% of households” – see: Who would lead Nats into 2nd election? (paywalled)
Hooton pointed out that it was a captain’s call by Luxon to promise tax cuts, “which was closely followed by Simon Bridges’ resignation from Parliament and as Finance Spokesperson.” In this Hooton was picking up on the insider accounts of Bridges quitting politics as a direct result of being forced by his leader to announce a tax cut policy that he didn’t believe had been properly considered by the caucus, or even by him as finance spokesperson. He clearly decided he was better not to continue working under Luxon, and he could do more from outside of Parliament.
In terms of Key’s decision in 2009 to ditch his promised tax cuts, Hooton argues that the decisions served him well: “It enhanced rather than damaged his and Bill English’s reputations for straight talking and economic management.” It meant that people knew they were more concerned with being “responsible governors” than “desperate campaigners”. But the jury is still out on which camp Luxon and Willis fall into.
Hooton argued on Friday in the Herald that Luxon refuses to face the fiscal realities, and points to the International Monetary Fund warning “that Luxon’s planned $18 billion tax cut programme (including landlord tax breaks), scheduled to hit the economy in less than 15 weeks, is targeted at those most likely to spend the lot, which means it would be maximally inflationary. That would delay cuts to interest rates or force the Reserve Bank to increase them again” – see: NZ First now a voice for economic orthodoxy (paywalled)
Instead of directing money into tax cuts which will only exacerbate the re-emergence of “stagflation”, Hooton says that any funds that Willis finds from spending cuts should simply be used to pay back debt, which “would see inflation and interest rates fall immediately.” Not to do this would be, according to Hooton, “economic lunacy that not even Muldoon, David Caygill or Grant Robertson would have considered ahead of their 1984, 1990 and 2023 nadirs.”
Hooton and the likes of John Key aren’t exactly out on a limb with their opposition to tax cuts at the moment – there are plenty of other mainstream economists and Establishment institutions that are also issuing advice against National’s fiscal plans. Hooton has put together his own list: “Treasury, IRD, DPMC, RBNZ, Infometrics, Sense Partners, the NZ Initiative, the Taxpayers Union, and the IMF”. None of these voices are necessarily against tax relief in general, but are united in giving advice against it happening in the current economy.
The growing consensus against tax cuts
Writing in the Listener today, Danyl McLauchlan argues that for the greater good, National needs to ditch tax cuts this year: “The best thing for the economy would be to cancel or defer the tax cuts: they’re obviously unaffordable, and if they’re part-funded by borrowing, there’s a risk they’ll be inflationary” – see: Pre-election claims are coming back to bite the embattled PM (paywalled)
McLauchlan outlines that National politicians like Nicola Willis only have themselves to blame for getting into their current quandary by making election promises that they can’t deliver: “Nearly every economic commentator in the country expressed scepticism about the affordability of National’s extravagant promises but Luxon and Willis refused to release their modelling, reassuring the nation that the numbers were ‘rock solid’. In the months since the government was formed, we’ve seen an elaborate pantomime routine from the Prime Minister and his Finance Minister, playing the role of sad-faced clowns turning out their pockets and rubbing tears from their eyes. There’s no money! The economy is deteriorating! There are fiscal holes in the government’s books! All of these problems National warned us about during the campaign have found them dumbstruck in its aftermath.”
Darkly, he suggests that Luxon and National are likely to go the same way that the UK Conservatives have in recent years – deeply unpopular and mismanaging the economy: “If he borrows to pay for them he’ll be compared to Liz Truss, the shortest-serving prime minister in British history, who generated a currency crisis with a reckless plan to fund tax cuts with large-scale borrowing, and would risk lowering the value of the dollar.”
Herald business editor Liam Dann also wrote in the weekend that the Government is looking “cruel and miserly” in its obsession with cutting spending to deliver some sort of tax relief, and he makes it clear that he thinks the “madness” of tax cuts needs to be halted – see: Tax cuts need to be put on hold until we can afford them (paywalled)
In trying to understand why Luxon is pursuing such a bad policy, Dann suggests it must simply be “for ideological reasons” such as a belief that “trickle-down economics” will make everyone richer. This won’t wash with the public, and Dann says the public would hardly be likely to punish National for delaying the cuts.
According to The Post’s Andrea Vance, Luxon is now trying to deliver tax cuts that won’t really be very impressive – it’d be a halfway measure that alienates all sides of politics, which indicates that the new PM hasn’t really made the transition from business to politics – see: National’s doing the hokey-cokey and getting shaken all about (paywalled)
Here’s her conclusion: “As as result of this CEO-cracy, Luxon is doing a sort of hokey-cokey with the policy that will ultimately make no-one happy. The Government is half-in and half-out with tax cuts, and it is not fully committed to austerity (baulking when the cuts appear to dig into frontline services). Yes, Willis will deliver some form of tax relief in July, but Luxon won’t now commit to that being the full package promised at the election. If the delivered relief is meagre, then it’s likely the public will react more badly to the austerity required to pay for it than they do positively to the tax cuts themselves. Luxon should abandon the dance. It is proving too much of a distraction from the other work National is doing to grow the economy.”
There are already some signs that National are starting to buckle. In the weekend, Janet Wilson’s column outlined how Luxon and Willis are starting to backdown on the tax cuts, and are likely to deliver something much less significant than they promised. She points to the statements from the Beehive becoming much more equivocal and vaguer about what will be delivered. Wilson suggests that stronger signs that the tax cuts have been watered down might come in Wednesday’s Budget Policy Statement – see: The gentle art of making (and keeping) political promises (paywalled)
Questions about Nicola Willis’ judgement
Finance Minister Nicola Willis took on the finance portfolio from Simon Bridges when he could apparently no longer in good faith sell Luxon’s tax cuts. Ever since then she has been told over and over about the problems with the economy and why tax cuts shouldn’t proceed. She stuck to her guns from the start, promising to resign if she didn’t follow through on delivering tax relief.
National now seems determined not to break their election promises. And in the weekend, Newstalk’s Heather du Plessis-Allan reiterated what a problem it would be if they didn’t deliver – see: We need to make sure politicians deliver on their promises
She says that National can’t now argue that they didn’t know they couldn’t afford tax cuts – as they’ve known the facts all along. But du Plessis Allan says that National does indeed need to be punished if they don’t deliver – it’s a key part of our democratic system to hold politicians to their promises. Indeed, it would be a “broken promise.
Similarly, in the Listener today, Danyl McLauchlan says that “breaking a flagship election promise would be deeply unpopular” and “New Zealand voters are very reluctant to vote a government out after a single term, but a breach of trust on that scale might warrant an exception.”
However, if National combined a U-turn on tax cuts together with Willis falling on her sword over it, then the public would be much more forgiving and understanding. They would view it as the Government doing the right thing, and Willis paying the appropriate price for the big mistake.
But who could replace Willis as Finance Minister? Chris Bishop? Simeon Brown? Paul Goldsmith? None of these candidates would be particularly impressive, which is why Willis is probably safe from being forced to resign – National simply don’t have the credible economic talent to replace her. But regardless, her reputation has been badly tarnished by her role in promising and selling the poorly-conceived tax cuts.
Questions about Christopher Luxon’s judgement
If Willis were to resign after producing a Budget without tax cuts – and admittedly that’s extremely unlikely – then it would be a case of Luxon losing a second finance spokesperson over his insistence on tax cuts. When Bridges departed he did so without much fuss, but having Willis resign would be much more damaging for a government in its first year. And yet, that’s probably National’s best scenario to come out of this predicament.
Yet, even if tax cuts prevail and Willis stays on course, National could be on a direct collision course with coalition partner NZ First. Winston Peters, who is sitting around the Cabinet table alongside Luxon and Willis, rather than as a minister outside of Cabinet, is already showing that he’s willing to oppose their current direction. He might even threaten to refuse to vote for a Budget that proposes the type of tax cuts that Peters believes are irresponsible. Chaos would result.
The looming economic storms resulting from the Government’s fiscal direction should also concern everyone. We are likely to see more damage and more discontent.
For a warning about what happens when governments ignore the warnings about such discontent, Willis and Luxon would be wise to read today’s column by Chris Trotter, who argues that the dogmatic inflexibility of the new Government’s economic austerity measures could lead to protests and polarisation much more significant than what the last Government had to deal with on its Parliamentary lawn in 2022 – see: Rapture and rage. Trotter concludes: “If Jacinda Ardern’s government struggled to contain 3,000 angry Kiwis in 2022, how will Christopher Luxon’s cope with 300,000 in 2025?
Dr Bryce Edwards
Political Analyst in Residence, Director of the Democracy Project, School of Government, Victoria University of Wellington
This article can be republished for free under a Creative Commons copyright-free license. Attributions should include a link to the Democracy Project (https://democracyproject.nz)
Cartoons today:
The essay paints a very unsettling picture. “Strong stable government”- not! Hipkins has a long, long way to go, unfortunately, to rebuild trust that he understands what leadership is about. Hopefully though Labour, the Greens and Te Pati Māori have the incentive and capacity to build a strong working relationship together- with strong policies for when the coalition glue unsticks.
The two of them need to fall on their swords - right now! Urgent surgery called for: