Comment

Leadership questions from the CGT wreckage

ANALYSIS: Wednesday was one of the most significant days in the Labour party’s history. It walked away from a flagship policy, one that it had advocated since 2011.

It was also a massive day for millennials.

Taking capital gains tax off the table under Jacinda Ardern’s leadership effectively puts it out of reach for at least a decade - on the assumption Ardern intends to lead Labour into the next election.

With neither National nor an Ardern-led Labour supporting a CGT, the earliest we could see the tax would be in 2023, and that would require National to win the next election, Ardern to resign or be rolled, and the next Labour leader campaigning on the CGT.

That seems unlikely, to put it mildly. More likely Ardern governs for four or nine years, then National does the same. That means a CGT isn’t likely to go to an election for at least 11 or 17 years.

Why is that significant? Because the economy is changing and the tax system isn’t changing with it. Decisions over what we tax and what we don’t are meant to drive investment - and they do. That’s why we have Research and Development tax credits - they exist to encourage businesses to do the things we want them to do.

As has been pointed out again and again, the absolute last thing New Zealand needs anyone doing is buying more investment property.

But - and, despite being fairly obvious, this point hasn’t been well made over the last two months - tax also does something else: it pays for stuff.

The problem the Tax Working Group looked to solve was what happens when the changing shape of the economy means we start to run out of ways to pay for things.

The Government wrote a massive cheque to baby boomers — and it put millennials’ signature to it.

Let’s look at the economy in 12 years' time, the earliest feasible point at which the tax system is likely to change.

The year is 2030, and there’s a 1.2 percent budget deficit thanks to an ageing population that has placed more strain on our superannuation and health schemes than we have taxpayers to deal with.

This shouldn’t be sniffed at. In 2009, as New Zealand fell into the GFC, we had a budget deficit of 2.1 percent.

And it gets worse. By 2045, that deficit has opened up to a massive 4 percent, and each one of those 15 years in between we have added more and more to our national debt. Up and up it goes.

That’s the world that we signed up to yesterday. The Government wrote a massive cheque to baby boomers - and it put millennials’ signature to it.

This is before we get to the billions of dollars councils estimate they will need to fight the effects of climate change.

Capital gains tax in some form (perhaps not on businesses, which need capital investment to fuel productivity growth) would have helped mitigate this. It makes sense to tax capital gains, as windfall gains from property are growing out of step with the economy, whilst the tax take from income earned from labour is likely to fall as a result of stagnating wages and digital disruption.

It should go without saying that the tax system should move with the economy. Not to the extent that it stifles growth, but enough to fund essential services.

Ironically, taxes on capital are older than taxes on income. Land taxes are some of the oldest taxes on the books. They were easy to calculate and pay, especially when it was just a tiny minority of people who owned most land and paid the most tax. And, before the industrial revolution land was more or less the only thing you could earn a substantial amount of money from anyway.

Climate change might be something important — worth marching and protesting about and a few t-shirt slogans, but not worth fundamental root and branch reform.

But during the Napoleonic Wars, Britain faced an existential threat - France. It needed to raise additional revenue to fight off Napoleon, which it couldn’t get from the existing tax regime. Fortunately, Britain was entering the industrial revolution, which created an entire class of people who earned income not from the massive estates they owned, but from the companies they founded.

William Pitt the Younger (aged just 24 - the same age as Chlöe Swarbrick) legislated the first income tax to tap some of this income to fight off Napoleon. It didn’t destroy business (the industrial revolution still happened) but it did raise revenue sufficient to defend the country.

That’s the problem with the current Government’s claim that climate change is the “Nuclear Free moment of [her] Generation”. Perhaps it is. For the Prime Minister’s generation climate change might be something important - worth marching and protesting about and a few t-shirt slogans, but not worth fundamental root and branch reform.

For the generation behind the Prime Minister, climate change and the ageing population are existential threats. They’re Napoleon.

To put it in terms boomers might be better acquainted with, on the issue of climate change, Ardern is more Neville Chamberlain than Winston Churchill.

But the second thing this week taught us was the nature of the constraints placed on Ardern's leadership.

She repeatedly raised the question of whether there was a public mandate for a CGT. A recent TVNZ poll showed that there was a slim mandate, if paired with income tax cuts. But this isn’t really the issue.

Leadership - in case the name didn’t give it away - requires creating a mandate for things you believe in and which require you to take the public with you.

John Key’s decision to proceed with partial asset sales in his second term is an almost exact ancillary.

The National Party believes in limited government, and has a longstanding aversion to the state owning assets that could be privatised. After the disruptive mass-privatisations of the 1980s and 1990s however, the New Zealand public was not so convinced.

National knew this. As emails leaked to Nicky Hager and published in his book, The Hollow Men, revealed, National went out of its way to reassure the electorate that it would not privatise assets in a first term. This neutralised one of the misgivings the electorate had about National.

When Key eventually won office, he put asset sales to the electorate who would give him a mandate for a second term. Just as Ardern would have done with a CGT.

The electorate was almost certainly not on his side, but the bargain was simple: if you want John Key, you’ve got to take the asset sales.

The incredibly popular Jacinda Ardern is in the same position. Voters may not love the CGT, but if paired with her leadership, she would likely get it across the line.

Asset sales were almost certainly less popular than the CGT. The issue went to the Waitangi Tribunal, which ruled the sales could not proceed before issues relating to Maori water rights were sorted out.

A petition signed by 327,224 voters was presented to Parliament, triggering a citizens’ initiated referendum where nearly 1 million (67 percent) people voted against the sales. Putting that into perspective, the asset sales were opposed by more people than supported the gun law changes, in last week’s TVNZ poll.

But Key went ahead anyway. Why? He knew what he wanted to do. He led, the rest of the country had to follow.

Ardern, however, was nowhere to be seen on CGT over the past few months. As Newsroom has already noted, while Ardern came out a strong supporter of the tax yesterday, her voice was nowhere after the Tax Working Group delivered its report.

... it will be devastating for the economy if we’re still fighting the battles of the 1980s in 2030.

But there is one thing Ardern has to deal with that Key never did: a muscular minor party within her own Cabinet that could walk any day and bring down the Government.

Peters knows this. He gestured to it in Wednesday’s press conference, alluding to the fact that it was his decision to side with Labour that made all the difference back in 2017. Key never had to manage such a threat, and was able to run a much more stable Government as a result.

And there were other fascinating clues to Peters’ decision making in Thursday’s press conference.

It was, he said, New Zealand First’s 26th birthday party yesterday, and Peters, like the party, is still fighting the battles of the 1980s.

“Bear in mind this, there are a whole lot of people in the housing market because they were pushed there by jungle created by the Lange Government, not by Lange but by Douglas from ’84 onwards,” Peters said yesterday.

“The thing about that jungle was people thought, 'I won’t go to the sharemarket because it’s so irresponsible, I’ll go into the housing market,' now, having done that, in our view it would be wrong to start hammering them for making that decision forced upon them by irresponsible neo-liberal politicians”.

He was referring to the deregulation undertaken in the 1980s which contributed to massive over-valuations of New Zealand stocks, which crashed in 1987, taking out many peoples’ retirement savings and convincing an entire generation of people to only invest in things they can see and touch.

Peters is right, of course. The history on that point is incontrovertible. But it will be devastating for the economy if we’re still fighting the battles of the 1980s in 2030.