National's quandry on tax is complicated by the financial crisis. Global demand is likely to soften in the short-term which will impact NZ just like every other country. Cutting personal and/or corporate tax can't offset this and so even if National gets some political advantage going into the election, it still faces the prospect that GDP may weaken over the next three years. That's not their fault, but it's unclear what they will do about it.
I've been impressed by the commentary of the New Zealand Institute. Compared with the Business Roundtable, Skilling's team are unencumbered by past battles and less ideological. Several publications point out that New Zealand's low trade intensity and foreign direct investment are significant constraints on economic growth - Key might have thought his infrastructure plans might improve FDI but that may be less likely now.
A tax cut doesn't lift productivity. A corporate rate cut may improve profits and encourage investors, but by itself, it has only a one-off benefit. National's cure-all tax cuts may realise an electoral advantage later this year, but it is an inadequate response that, alone, is unlikely to realise sustainable productivity improvements. I don't doubt they know this, but they've backed themselves into a corner and must deliver even if it ends up crowding out other options.
2 days ago