Using tax cuts to revive the economy – How the poms see NZ

The opposition likes to talk down the economy and the government, yet New Zealand has recovered faster than the rest of the world from the global financial crisis, without the need to slash and burn.

Our economy is the envy of the world.

Even the Poms see that:

In New Zealand, John Key’s National Party romped home to victory on a platform of cutting taxes and balancing the budget, trouncing a Labour opposition that promised to put up taxes. Slashing the top rate of tax has revived the economy, and been rewarded with electoral success as well. True, there are lots of differences between New Zealand and this country. And yet the truth is, there are a fair few similarities as well – and if tax cuts can work there, they can work here.

For a small place a long way from anywhere, New Zealand has a fine history of leading the way with radical experiments in economics. While we were battling over Thatcherism, and the Americans were debating Reagan-omics, the Kiwis had “Rogernomics”, created by the Labour finance minister Roger Douglas. What had been a very 1970s, state-dominated mixed economy was swiftly transformed under Douglas into a laboratory for free market ideas. Financial markets were deregulated, the money supply was brought under tight control, the currency was floated, and industries were privatised. It was a mix that was to become orthodoxy by the 1990s, but Douglas was implementing it while our Labour Party was still planning to nationalise the top 100 companies.

Now it is doing it again – except this time without any encouragement from the US or the UK. Ever since the financial crash of 2008, even centre-Right governments have followed a very narrow path, buying into high taxes, and near-zero interest rates, and allowing budget deficits to balloon, even when financed by printed money, to keep the economy afloat. No one has strayed far from the orthodoxy. Except, that is, New Zealand.

Yes except New Zealand…which is in recovery mode…and booming.

In 2010, with the global economy still reeling from the crash, New Zealand started shifting taxes from earnings to consumption. Sales tax was increased from 12.5pc to 15pc. But the top rate of tax was reduced from 38pc to 33pc, and taxes were cut along the income scale. Corporation taxes were cut by two percentage points. There were some cuts in spending to accompany the package, but it was mainly a bet that lower taxes would create faster growth; a risky assumption at the time.

It worked. New Zealand has witnessed one of the most robust recoveries in the developed world, and one that was hardly helped by a major earthquake in Christchurch in 2011. This year, the economy is forecast to expand by 3.9pc, a faster rate than the UK or US. Higher revenues, and tight control of public spending, means it is one of only three OECD countries expected to balance its budget since the crisis of 2008. Switzerland and South Korea are the other two.

Unemployment has fallen to 5.6pc, lower than this country, and the lowest level in five years. In March, the central bank started raising interest rates, making it one of the few in the developed world to take a step that both the Bank of England and the Federal Reserve are still too nervous to attempt. Since then, it has pushed up rates four times to 3.5pc, far higher than the 0.5pc that the UK is stuck at.

And yet the opposition parties campaigned against every single thing National did. They knew best. Fortunately for New Zealand they were wrong.

That economic success has converted to electoral popularity. In the election last weekend, Key’s party scored 48pc of the vote, taking it close to the first outright majority for a single party since the country switched to PR in 1996. The Labour Party got 25pc, with the Greens on 10pc. With a faltering global economy, and with real wages stagnating across the developed world, incumbent governments have been getting pummelled everywhere. Not this one. Labour was promising tax rises, while the National Party was pledging more cuts, as well as a programme of paying down the debt. It was clear which voters preferred.

There are plenty of differences between the UK and New Zealand. It is a tiny country, with only 4.5m people. It has been helped by strong dairy prices, although agriculture only accounts for 4pc of GDP compared with 10pc in the 1970s. It has far more limited government, with the state consuming 32pc of GDP, compared with 45pc in this country. Perhaps most importantly, it is plugged into the fast growing Asian-Pacific economy, while we are tied to the eurozone.

But it is not radically different. We share a common legal system, and much of the same history. Whereas New Zealand ranks fifth for global competitiveness, we are not far behind at 14th.

It’s the economy stupid…something David Cunliffe forgot and certainly something the hard left forgot as they wittered away about spying and dirty politics.

New Zealand has just showed us none of those arguments is true. Taxes were cut, and the government that slashed them got re-elected by a landslide. The reason is not hard to understand. Most people don’t follow the details of the economic arguments very closely. But they like prosperity. Cutting spending and taxes are the quickest way to achieve that, and voters will reward any party that delivers it. Perhaps someone should give it a go in this country.

Has the opposition learned this lesson?

I suspect not.


– The Telegraph

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