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Jacinda Ardern just did a John Key

Jacinda Ardern just capitulated to the gold card generation. For a generation. Needlessly. There will be a reckoning when generation rent outvote the baby boomers, writes Bernard Hickey.

John Key famously shut down a toxic debate for his side of politics when he promised to resign if he ever increased the age of eligibility for a universal New Zealand Superannuation from 65.

It worked.

No one in his party was able to raise the issue again while a popular Key led the party and was Prime Minister. Even Bill English, who privately thought it was an unsustainable position, kept his trap shut. English only opened the issue up again when he became Prime Minister.

Key's promise to resign neutralised an issue that had bedeviled National throughout the 1990s and early 2000s and had helped provide a launching pad for - you guessed it - Winston Peters. It also made electoral sense because the period from 2000 to 2017 was dominated in a demographic sense by the bulge of voters born after 1945 and before 1970.

It was a policy built for baby boomers, who stood to gain the most from a universal pension linked to the faster-rising average wage, unlike other benefits, which are linked to consumer price inflation.

It worked for Key and helped him win three elections with the votes of many older voters who might otherwise have voted for New Zealand First. Key never had to do a deal with Peters, and some might argue he jumped from the top job in 2016 because he knew he would have to deal with Peters.

This chart of the demographic profile of 2008 shows how dominant the 45-65 group were in the voting population at that time, particularly given their significantly higher turnout rates than the youngest demographics. The bulge of youngsters behind them were only just turning 18.

Now Jacinda Ardern has chosen the same tactic to shut down the issue of a capital gains tax, which has proven just as toxic for Labour through the last decade as the pension age was for National in the 1990s. It dominated the election debates of 2014 and 2017, and had seemed set to be a lightning rod for opposition by both National, and more problematically, New Zealand First ahead of 2020.

It still beggars belief that Ardern had not got Winston Peters on board before embarking down the Tax Working Group track in early 2018 with a capital gains tax in mind. Perhaps she genuinely thought Peters would change his lifetime opposition to the tax, or forget who his supporters were. Perhaps she thought Peters would be electorally strong enough to give her a free pass.

Whatever the case, Peters did not change his mind and his predictably weak polling results midway through his term as Deputy Prime Minister stiffened that opposition. After all, if your brand is to be the champion of the over 65s, why would you say yes to a capital gains tax?

Her decision to drop the idea seemed inevitable from the day she formed a coalition with Peters. The CGT was notably not part of the coalition agreement. She even acknowledged the electoral reality just over a week from the election by ruling it out during her first term.

You will live longer than Winston

But what she did on Wednesday was unfathomable.

She ruled out a capital gains tax "under my leadership in the future". She is only 38 and could conceivably be the leader and Prime Minister for another decade.

By making such a definitive statement, she has effectively shut down the idea of taxing wealth inequality for a decade.

And she didn't need to.

Winston Peters, who is 74, is statistically less likely to be in politics for longer than Ardern, let alone be alive. He is even less likely to be in a position to boss a Government around after the 2020 election, if the current polling trends are anything to go by.

It made electoral sense to suck the CGT oxygen out of National's opposition for the next election, but to say you won't do it for the rest of your career is mind-boggling.

The old got richer as the young got more populous

It also flies in the face of the changing demography of the electorate and the wealth shares in our society.

One reason Labour and the Greens just got over the line in 2017 was a slight up-tick in voting rates among young voters, and that there were more of them able to vote. The free tertiary education promise helped, but I also saw the enthusiasm for Ardern's message on the campuses for a fairer tax system that taxed gains on property wealth.

The Electoral Commission documented an extra 52,000 people under the age of 30 who voted in 2017 than voted in 2014. In an MMP electoral landscape, that is a significant number.

One advantage the baby boomer generation had through the 2000s was it was larger and voted at a higher rate. But those electoral advantages are ending, which makes Ardern's complete capitulation for a decade doubly surprising.

Voting rates tend to rise a bit as cohorts age, and that will happen as the bulge of millennials goes through the electoral system and become more numerous.

Put simply, the electoral tailwinds for the 2020, 2023 and 2026 elections are behind any party that appeals to those aged 18-39, and they are the age groups that have been hit hardest by the explosion in housing costs over the last decade. This chart of the demographic layout for the 2026 election shows the contrast with the 2008 chart above: the young will overpower the old in electoral terms.

The scale of the tax-free capital gains for the victorious cohort of baby boomers in this debate is more astonishing than even they understand - or the voters of 2023 and 2026 yet know.

Boomer wealth up $99b in three years, while young voter wealth fell

Statistics New Zealand reported in December that the net worth of the 15-35 year old cohort actually fell 1 percent to $61 billion between 2015 and 2018 as their student debts rose and they lacked any property wealth growth.

The net worth of over 65s rose by $99 billion, or 25 percent, over that same period to $494 billion, largely because of leveraged property value growth.

Over two thirds of that gain was tax-free. If it had been taxed at the same marginal tax rate as other forms of income, the Government would have been around $30 billion better off to fund extra homes, schools, hospitals, railways and roads in the last three years.

Instead, the Government is crying poor because of its net debt limit of 20 percent and the biggest increases in Government spending are around New Zealand Superannuation and medical costs of the aged. Eventually the young cohorts will work this out and do something about it.

So a day of reckoning

Young voters are unlikely to just sit there and take it. They may have been disappointed by Ardern's promises of transformation and action to improve tax fairness, but they will find a home to vote for.

At some point there will be room for an anti-Winston party, or more likely a party to agitate for the interests of generation rent.

Essentially, Winston Peters rose up (and down) through the 1990s and 2000s to appeal to the electorally numerous demographic of those close to retirement.

There has to be some sort of anti-Winston populist out there able to harness the sense of revulsion at the stubborn selfishness of the boomers and the desire to punish them and redistribute their wealth.

An anti-Winston party?

Policies aimed at means testing the pension and health costs would seem obvious, along with the abolishment of the gold card for pensioners. It could easily be reinvented as a student's gold card with free public transport and discounts for the young, along with priority access to state housing. A land tax (ruled out by Ardern) would seem obvious too.

The Greens would argue they are the party to reap this whirlwind, but a party of the nativist right could just as easily grab that support with calls for aggressive redistribution of wealth, along with tough migration controls and heavy state investment in housing and public transport.

Scarily for the Greens, this landscape is tailor-made for a backlash against climate change policies that increase the living costs of the poor.

The surprisingly strong showing of the Finns Party in last week's Finnish elections gives a hint of how volatile this new landscape could be. It opposed both migration and policies aimed at combating climate change.