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Posts Tagged ‘PREFU’

Did National knowingly commit economic sabotage post-2008?

24 January 2013 19 comments

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cheesecolour tax cuts

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By now, it has become fairly well known that National’s tax cuts in 2009 and 2010 were unaffordable and impacted disastrously on government revenue (and subsequent spending) in following years.

In 2008, National tempted voters with promises of “self funding” tax-cuts. (Though “self funding” was never very clearly explained.)

National’s rebalancing of the tax system is self-funding and requires no cuts to public services or additional borrowing.

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This makes it absolutely clear that to fund National’s tax package there is no requirement for additional borrowing and there is no requirement to cut public services.

Source: Economy – Tax Policy 2008

The pledge of  “no requirement to cut public services  ” was also one that was made (and subsequently broken in dramatic fashion).

In May 2008, Key was making bold statements  of  “meaningful”  tax cuts,  “north of $50“,

John Key…  said National would be looking at economic figures and what other promises Dr Cullen made in the budget on Thursday… But he was very confident” National could deliver an ongoing programme of tax cuts, like that promised in 2005”.

See: National’s 2005 tax cut plans still credible – Key

Despite the growing black clouds of  a global downturn, Key was still optimistic. When questioned by Sue Eden of the NZ Herald whether National’s tax cuts programme of 2005 were still credible given uncertain economic circumstances, Dear Leader replied,

Well, I think it is.”

See: IBID

By early August 2008, as United States mortgage-institutions Fannie Mae and Freddie Mac  were  sinking into a credit crisis, Key remained defiant in the face of looming recessionary forces,

National will fast track a second round of tax cuts and is likely to increase borrowing to pay for some of its spending promises, the party’s leader John Key says.

But Mr Key said the borrowing would be for new infrastructure projects rather than National’s quicker and larger tax cuts which would be “hermetically sealed” from the debt programme.

The admission on borrowing comes as National faces growing calls to explain how it will pay for its promises, which include the larger faster tax cuts, a $1.5 billion broadband plan and a new prison in its first term.

It has also promised to keep many of Labour’s big spending policies including Working for Families and interest free student loans.

Mr Key today said there would be “modest changes” to KiwiSaver.

See: Nats to borrow for other spending – but not tax cuts

How does one ” “hermetically seal” tax cuts  from the debt programme ” ?!

The ‘crunch’ came on 6 October 2008, when Treasury released a document known as the “PREFU” (Pre-Election Economic and Fiscal Update). This Treasury report analyses and discloses the fiscal and economic state of the nation, with short and medium-term outlooks, based on international and local trends.

The 2008 PREFU started with this dire warning,

The economic and fiscal outlook has deteriorated since the Budget Update

In the five months since the Budget Update was finalised, we have witnessed a number of significant domestic and international developments: in particular, the deepening of the international financial crisis, the slowing housing market, and growing pressure on households and businesses. These developments are key factors in our updated view of the economy and the government’s finances set out in this Pre-election Update.

We are now expecting weaker economic growth over the next few years, resulting in slower growth in tax revenue and higher government expenditure. Combined with increases in the costs of some existing policies, these factors lead to sustained operating balance deficits and higher debt-to-GDP ratios.

The economic outlook is weaker …

Imbalances have built up during nearly a decade of sustained growth, including inflation pressures, an overvalued housing market, high household debt and a large current account deficit, with implications for interest rates and the exchange rate. With the economy slowing, these imbalances are starting to unwind – as are imbalances in the global economy – but there is a long way to go.

See: PREFU 2008 – Executive Summary

The opening statement went on to state with unequivocal frankness,

The international financial crisis has deepened and is having an adverse impact on global economic growth. New Zealand is expected to feel the effects of the financial crisis principally through the tighter availability and increased costs of credit, but also through a fall in business and consumer confidence, falling asset values and lower demand and prices for our exports.

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The weaker economic growth that we are forecasting is reflected in reductions in our tax revenue forecasts. Compared with the Budget Update, we expect tax revenue to be on average around $900 million lower for each of the next three years.

  • The weak outlook for the household sector will have a direct impact through GST, which is forecast to grow by around 4% per annum over the next five years, compared with 7.5% over the six years to 2007.
  • With firms’ margins under pressure and profitability low, underlying corporate income tax is forecast to decline by 3% in the 2009 June year, and growth is expected to be negligible in 2010 as accumulated tax losses offset profits.
  • A relatively robust forecast for wages over the next few years helps to keep underlying growth in PAYE up at around 5% per annum.

The largest single change in government spending in the Pre-election Update is an increase in the expected costs of benefits. Compared with the Budget Update, benefit expenses are around $500 million per annum higher, reflecting both an increase in numbers of beneficiaries as a result of the slowing economy, and the impact of higher inflation on the costs of indexing benefits.

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As a result of the various factors set out above, the government’s debt outlook deteriorates. This leads to higher debt servicing costs, which are forecast to be around $500 million per annum higher

See: IBID

Treasury continued – in considerable detail – to outline the gloomy prospects  for New Zealand’s fiscal and economic short-term and medium-term outlooks (see:  Fiscal Outlook),

In Risks and Scenarios, Treasury wrote,

Since the Budget Update, global developments have been more in line with the alternative scenario than the Budget forecast and global financial and economic conditions have worsened significantly. On the domestic front, finance companies have continued to face reduced debenture funding and more finance companies went into receivership or moratorium in the past three months. The speed and magnitude of the slowing in domestic demand has been more abrupt and greater than forecast in the Budget Update.

Reflecting these recent international and domestic developments, we have made significant downward revisions to our growth forecasts in this Update. However, the financial turmoil has intensified since the finalisation of our economic forecasts. As a result, we have seen the downside risks to our growth forecasts increase markedly, particularly in the years to March 2010 and 2011.

See: 2008 PREFU – Risks and Scenarios

Unlike his “lack of knowledge” over the GCSB monitoring of Kim Dotcom, or the Police report on John Banks, John Key cannot feign ignorance over the 2008 PREFU report,

John Key has defended his party’s planned program of tax cuts, after Treasury numbers released today showed the economic outlook has deteriorated badly since the May budget. The numbers have seen Treasury reducing its revenue forecasts and increasing its predictions of costs such as benefits. Cash deficits – the bottom line after all infrastructure funding and payments to the New Zealand Superannuation Fund are made – is predicted to blow out from around $3 billion a year to around $6 billion a year.”

See: Key – $30b deficit won’t stop Nats tax cuts

Especially when Bill English admitted his knowledge of the PREFU,

The figures outlined in the Prefu are a bit worse than we expected, and we are currently digesting them. However, National is not content to run a decade of deficits.”

See: IBID

In an example of black-humoured irony, English went on to say,

New Zealand can no longer afford Michael Cullen and Labour’s big-spending low-growth policies.”

See: IBID

But evidently New Zealand could afford National’s  “ big-tax-cutting low-growth policies“?

On 6 October 2008, Key reacted to the PREFU (proving he had full knowledge of it’s contents, and made this astounding comment when questioned about National’s planned tax cuts, at 0:40,

“REPORTER: What is your growth programme, does it include tax cuts?.”

“JOHN KEY: It certainly does include tax cuts. We have a programme of tax cuts.”

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Key reacts to 2008 PREFU figures

See: Key reacts to [2008] PREFU figures

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Key’s comments following 0:40 seem equally bizarre, and at 2:28 admits that “… we can’t deliver anything other than, ‘yknow,   a legacy of deficits for New Zealand…” – and still continues to warble on about cutting taxes, including trying to justify “debt for future growth“.

The consequences were a $2 billion hole in government tax revenue (see:  Outlook slashes tax-take by $8b;   Govt’s 2010 tax cuts ‘costing $2 billion and counting’); budget deficits (see:  Budget deficit $1.3b worse);   increased borrowings (see:  Govt borrowing $380m a week); cuts to the State sector in terms of services and jobs (see:  Early childhood education subsidies cut; 10 August: Unhealthy Health Cuts, 2500 jobs cut, but only $20m saved); and surreptitious increases in government charges and taxation elsewhere (see:  Petrol price rises to balance books; Student loan repayments hiked, allowances restrictedPrescription charges on the rise); and asset sales  (see: Govt says asset sales will cut debt).

The point of this blogpost is simple.

It’s not to look back, at the past…

… it is to look forward to the future.

When National makes Big Promises, be wary of the nature of said promises, and the underlying , invisible “hooks” contained within them.

Quite simply when the Nats offer you a “tax cut”, the first question that should pop into your head is not, “Oh goody, I wonder how much I’ll get!”

The first thought should instead be, “Uh oh, I wonder how much that’s going to cost me!”.

Because as sure as evolution made little green apples and the sun will rise tomorrow, the Nats care very little about your pay packet.

They care only about “rewarding hard work” [translation: more income for the rich] and “making the veconomy more competitive”  [translation:  implementing their neo-liberal agenda for their ideological crusade to turn this country into a Market-driven economy, away from an egalitarian society].

In the process, if they have to turn our country into a slow-rolling, economic train-wreck, then so be it.

They can always blame someone else,

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Key blames Labour for his Govt's wage gap failings

See video: Key blames Labour for his Govt’s wage gap failings

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Key even blames Labour for the  global recession !? (see @ 0:48)

In the meantime, did National recklessly  damage the New Zealand economy with unaffordable tax cuts, despite Key & Co being given ample warning by Treasury – simply to get elected in 2008?

Draw your own conclusions.

The evidence speaks for itself.

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I lied  get over it!

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Additional reading

The Atlantic: Tax Cuts Don’t Lead to Economic Growth, a New 65-Year Study Finds (16 Sept 2012)

References

National Party: Economy – Tax Policy 2008

NZ Herald: National’s 2005 tax cut plans still credible – Key (20 May 2008)

NZ Herald: Nats to borrow for other spending – but not tax cuts (2 Aug 2008)

The Treasury:  Pre-election Economic and Fiscal Update 2008 (6 Oct 2008)

NZ Herald: $30b deficit won’t stop Nats tax cuts (6 Oct 2008)

BBC News: Bank shares fall despite bail-out (13 Oct 2008)

Bay of Plenty Times: John Key: We cannot afford KiwiSaver (11 May 2011)

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Authors of our own mis-fortune?

20 February 2012 5 comments

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“Those who would actively choose to drive New Zealand into further debt to pay for tax cuts lack real ambition for our economy.”Finance Minister Michael Cullen, 7 March 2008

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“…in 2005 we promised tax cuts which ranged from about $10 to $92 a week, roughly $45 a week for someone on $50,000 a year. I described it as a credible programme of personal tax cuts and I’m committed to a credible programme of personal tax cuts. I believe that an ongoing programme of personal tax cuts that delivers the sort of magnitude that we’ve had in the past is potentially possible.”John Key, Leader of the Opposition, 20 May 2008

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“National will fast track a second round of tax cuts and is likely to increase borrowing to pay for some of its spending promises.” –  John Key, Leader of the Opposition,  2 August 2008

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“Our tax policy is therefore one of responsible reform…  We have ensured that our package  is appropriate for the current economic and fiscal conditions… This makes it absolutely clear that to fund National’s tax package there is no requirement for additional borrowing and there is no requirement to cut public services… National’s rebalancing of the tax system is self-funding and requires no cuts to public services or additional borrowing.”John Key, Leader of the Opposition, 20 October 2008

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“Taxpayers do not want further tax cuts if they mean more government borrowing, a new survey shows. The survey comes as social welfare campaigners say tax cuts failed to help those most in need. The New Zealand Business Council for Sustainable Development survey found that while most people wanted tax cuts planned for 2010 and 2011, they did not want them if it meant further borrowing… The survey found most people would spend the tax cuts on living expenses, while others looked to credit-card debt and mortgage payments. “New Zealand Business Council for Sustainable Development, 11 April 2009

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In 2008, National campaigned on promises of tax cuts knowing full well this country could not afford them. By November 2008, as New Zealand went to the polls, the international global banking crisis was in full swing, and recession was beginning to hit nearly every single nation on Earth (Australia and China were the lucky exceptions).

By March 2008, the US Federal Deposit Insurance Corp had identified 76 American banks as “in trouble”.

By July 2008, US financial giants, Fannie Mae and Freddie Mac were in trouble – and by September, both corporations were placed into a form of receivership.

A week later, and Lehmann Bros – one of the largest financial institutions in the US filed for bankruptcy. On the same day, the Russian stock market was forced to close, as shares plunged by up to 20% in a day.

On 26 September 2008, it was officially declared that New Zealand was in full recession.

(See full Time here.)

Against this backdrop, National proceeded with it’s election promises of tax cuts. As unfolding events would show, they were irresponsible promises – and carrying them out in April 2009 and October 2010 was even more reckless,

“John Key has defended his party’s planned program of tax cuts, after Treasury numbers released today showed the economic outlook has deteriorated badly since the May budget. The numbers have seen Treasury reducing its revenue forecasts and increasing its predictions of costs such as benefits. Cash deficits – the bottom line after all infrastructure funding and payments to the New Zealand Superannuation Fund are made – is predicted to blow out from around $3 billion a year to around $6 billion a year.”NZ Herald, 6 October 2008

Fast-forward four years, and we are now having to pay for those taxcuts – which were funded by borrowing other peoples’ savings from offshore banks,

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Source

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Full Story

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Full Story

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It is obvious to all but the most blinkered National/ACT supporter that our debt is growing because we have a shortfall of revenue, caused by this government’s ill-conceived tax-cuts. That shortfall is in the order of $1.4 billion.

A business columnist for the NZ Herald wrote,

“Just how much became apparent yesterday with the $1.4 billion drop in forecast tax revenue for this financial year.

The overall upshot is the Government’s cash deficit has blown out from $13.3 billion to $15.6 billion this year taking into account the unexpected expenditure and the drop in forecast tax revenue.”Fran O’Sullivan, 15 December 2010

CTU President, , Helen Kelly wrote,

“The unsuccessful tax switch (we called it a “tax swindle” at the time) last year was not fiscally neutral as was claimed. There is a $1.4b revenue hole. It wasn’t a fair switch. The gap in take- home pay between someone on $30,000 and someone on $150,000 a year grew by $135 a week as a result of tax cuts made by this Government.”Helen Kelly, 23 May 2011

And ex ACT MP, Muriel Newman said,

If we look back at the state of the books just before the last election, the impact on the country of the recession and the earthquakes become more evident. Crown revenue today is $1.4 billion lower than three years ago and Crown expenses $2.2 billion higher.Muriel Newman, 14 November 2011

Interestingly, Ms Newman blames the  blow-out in  government debt on “the recession and the earthquakes” – but makes no reference to the ’09 and ’10 tax cuts. In fact, she pours petrol on a bon-fire by saying that “ACT would lower the top rate of income tax to 25% and the company tax to 12.5%“.

One can imagine what that would do to the government deficit! (But then again, ACT would sell every single state-owned enterprise and scrap most welfare, to fund their deep tax cuts.  A society governed under ACT policies would be utterly alien to anything most New Zealanders could have dreamed of. I suspect Australia’s population would rise by four million, practically overnight.)

And, spelling it out in even simpler terms, the PSA’s analysis of the figures,

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“Tax Cuts Widen the Gap Between Rich and Poor

  • Government chose to make tax cuts in worst recession in 70 years
  • Total tax cuts worth $5.5 billion
  • Top 10% income earners got tax cuts worth $2.5 billion
  • GST increased to 15% – hurts low and middle income most
  • Tax cuts + GST left $1.4 billion hole in budget

Since 2008, National has introduced tax cuts that cost New Zealand around $5.5 billion a year in lost revenue. Most of the benefit has gone to the wealthiest.

National’s first set of tax cuts – the personal tax cuts and ‘Independent earner rebate’ taking effect in April 2009 – cost approximately $1 billion a year.

The second set of cuts – cutting the top income tax rate from 38% to 33%, and the company rate to 28% – will cost $4.5 billion a year, according to figures from the 2010 Budget. That gives a total of $5.5 billion.

National claimed that because it was also increasing GST, the tax changes would be “revenue neutral” – that is, the increase in GST would cancel out the income tax cuts. In fact, the losses from the income tax cut will outweigh the gains from GST by $1.4 billion. In other words, the so-called “tax switch” has blown a $1.4 billion hole in the budget.

The tax cuts have also made New Zealand a less fair place. According to Labour, the wealthiest 10% of New Zealanders will get 43% of the tax savings. And the gap in take-home pay between someone on $30,000 and someone on $150,000 a year grew by $135 a week as a result of the tax cuts.

New Zealand’s income tax rates are among the lowest in the OECD, as the Tax Working Group acknowledged.

In Australia , for example, income over $80,000 is taxed at 37%, and income over $180,000 is taxed at 45%.

Figures from the OECD itself show that, before National’s tax cuts, New Zealand’s “all in” top income tax rate – a measure that includes all taxes on income, including local and regional ones – was 38%. In contrast, the all in top income tax rate in Australia was 47%, and in most countries it was higher still.”PSA.org.nz

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This blog can confirm the PSA’s statement that “figures from the OECD itself show that, before National’s tax cuts, New Zealand’s “all in” top income tax rate – a measure that includes all taxes on income, including local and regional ones – was 38%“.

Why did they do it? Why did National make a $1.4 billion committment it knew we could ill-afford?

Answer:

  1. Because they could.
  2. Because they wanted to be the government. Badly. And nothing quite wins votes like promises of tax cuts (even unaffordable ones).
  3. Because they probably had no idea how bad the recession would be? Rubbish. Of course they knew: John Key’s background was in international finance. He knew precisely how bad the Recession was – and how bad it was likely to get in Europe.

The question is: why did we, the voters, do it? Why did 1,053,398 New Zealanders cast their vote for National in 2008? Why did we vote for tax-cuts – something we knew was unaffordable?

Whatever the reason, we are having to pay for those tax-cuts – or rather, the $1.4 billion in revenue short-fall that we now have to borrow from overseas.  In doing so, as this government continues to post budget deficits, it continues to cut back on services; raise government charges; and sack those state workers who have spent many years of their lives doing all the things we expect done for us in education, health, defence force, border control, conservation, etc.

It is inevitable that, unless New Zealand wins the international equivalent of Lotto, this government (or it’s successor, sometime in the next three years) will have to raise taxes again. Or, steal a page from Gareth Morgan’s book and implement a new, Land/Wealth tax. There is no other way to pay of our debt and pay for Christchurch’s re-build.

Something for all New Zealanders to ponder, next time National (or any other Party) promises us a tax cut, in return for our votes.

In the mean time, Bill English signed a document last year called a “PREFU” – Pre Election Economic & Fiscal Update,

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This document is now worthless. It may have only one use left.

And finally, will Finance Minister Bill English accept “overall  responsibility for the integrity of the disclosures within the Update“?

Does any politician ever accept responsibility for anything?

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