Capital gains tax shutdown threatens govt's other plans

8:11 pm on 17 April 2019

Even if the government's decision to abandon a capital gains tax is - as some argue - a smart strategic move, it undoubtedly puts the rest of its agenda in jeopardy.

An auction sign outside a house for sale in Auckland.

Photo: RNZ / Claire Eastham-Farrelly

Consider the Prime Minister's pledge to halve child poverty within a decade, possibly the political priority closest to her heart. It is very difficult to see how that can be achieved without the $3.4 billion a year that the capital gains tax was, according to the most recent estimate, going to raise.

Lifting tens of thousands of children out of poverty will take money, and lots of it. And the government can't just rely on the economy delivering solid growth. A decent amount of that growth will go to middle-income earners - but meeting (at least one of) the child poverty targets requires lifting the incomes of poor families relative to those in the middle. In other words, it requires a redistribution, a shifting-around, of the proceeds of growth, not just growth itself.

The government could try to partly meet the targets by ensuring that working families get a bigger share of company profits. But that would require a significant change to workplace bargaining rules, beyond anything that Fair Pay Agreements might deliver, even if they were implemented.

Many of the government's other priorities - building more state homes, eliminating introduced predators, and repairing mental health services, among others - also require significant funds, again well above what will be generated under existing tax settings. Some of the government's goals can be achieved by regulation and putting costs onto businesses, but not many.

And it's not as if a capital gains tax is the only option that has been ruled out. Increases in income, business and inheritance taxes all appear to be off the table. Other options, such as environmental taxes, are still under consideration, but it is not clear that they will raise the kind of revenue required.

If the government can't fund its actions from tax revenue, the main avenue left will be to borrow more. At the moment it is blocked from doing so by its own Budget Responsibility Rules, which limit debt to 20 percent of GDP, roughly its current level.

However, ministers have for some time been preparing the ground for a relaxation of those rules. In an interview last year, Education Minister Chris Hipkins, picking his words carefully, told me the rules were a policy 'guiding this term of government'.

So if an increase in borrowing was already anticipated, today's announcement will make it essential. Higher public debt is not uniformly popular, and invites accusations - albeit false ones - of poor economic management. But it does not create any immediate or visible impact on the wallets of taxpayers, farmers or businesses, and is more politically palatable than tax increases.

It is not, though, a particularly sensible strategy long-term. Borrowing is fine, indeed sensible, for infrastructure, and up to a point. But it creates interest costs. It is hard to imagine the government funding all its extra programmes out of borrowing. And more generally, borrowing for current requirements, like payments to families, is widely regarded as inferior to funding them out of taxation, which is a better fit with the idea of living within one's means.

In short, today's announcement is likely to load pressure onto the debate about public debt, and push the government into a pretty sub- optimal position. We can also now understand the intensity of the opposition to a capital gains tax, or indeed any tax increase. Opposition parties now no longer need fight every single one of the government's plans - because to the extent that those plans rely on revenue that a capital gains tax would have raised, they have all just been shut down in one go.

*Max Rashbrooke is a journalist, author and academic. He's written for The Guardian, Metro, National Business Review and is the author of Government for the Public Good: The Surprising Science of Large-Scale Collective Action.

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