Key and English on GST

John Armstrong writes:

No politician enjoys confessing to having broken a promise – especially one made during an election campaign when credibility is very much the issue.

The Prime Minister has now shown himself not to be exempt from that rule of thumb.

Having flagged a hike in in the Government’s economic statement on Tuesday, was yesterday hammered by Labour for having categorically ruled out such a move in the lead-up to the last election.

“National is not going to raise GST. National wants to cut taxes – not raise taxes,” he told an impromptu press conference in the 2008 campaign, the video of which is receiving heavy play on the internet.

Key could not have been clearer. But his response yesterday was to argue he had been talking at the time in the context of fiscal forecasts which showed the country’s accounts sinking into deficit for the next decade. What he had been saying, he insisted, was National would not raise GST as a means of reducing the Budget deficit.

Key should be asking himself why he bothered to mount this defence. No sooner had he done so than Labour dug up quotes from Finance Minister seemingly similarly ruling out increasing GST after receiving Treasury advice shortly after the election to do so and then clearly reiterating that position in a speech two months later.

Given Key and English were almost certainly genuine in their holding that view at the time, it would surely have been more advisable for the Prime Minister to have been straight up and down yesterday and instead argued along the lines of “that was then and this is now”.

Rather than getting a ribbing from Phil Goff in Parliament, Key could have turned defence into attack, arguing that raising GST was now necessary to remedy what English describes as New Zealand’s “lopsided” economy – one suffering from too much consumption by debt-ridden households at the expense of much-needed savings and investment.

The question is whether Labour’s highlighting of this broken promise really matters all that much. It is not in the same league as cutting national superannuation or selling state assets after promising not to do so. At stake, however, is the Prime Minister’s credibility.

Key’s trust rating is extremely high, judging from polls scoring such attributes. Tax hikes are never popular, however. Key has to overcome public suspicion that any rise in GST will leave people worse off.

I understand a 2.5% rise in GST will probably lead to a one off inflation increase of 2.0%. In recent years our inflation rate has been around 3%, so I’m not sure how much people will notice.

I think they key will be the details in the May budget, as to the “compensation” through tax cuts, benefit adjustments and WFF support.

The label of a “broken promise” may be the bigger issue, even though there is a defence around the context of the statement.  There is probably a lesson there about being careful with pre-election statements – it is tempting to rule things out, but often wiser to be more subtle and say things like “That is not in our tax policy” rather than “We will not do that”.

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