Inflation

A Simple, Fair Solution to the Cost of Living Crisis

A Simple, Fair Solution to the Cost of Living Crisis

Everyone is talking about the cost of living crisis.

Inflation in the first quarter of 2022 was 6.9%, up from 5.9% in the last quarter of 2021 — the highest level we have seen since 1990. The price of food, rent and, in particular, fuel is going through the roof. Add this on top of our long-term crisis of low wages and housing unaffordability, and you have a colossal problem for poor and working class Kiwis who are already struggling to get by. It’s no wonder that a survey by Consumer NZ has found that this crisis has become New Zealanders’ biggest concern, and that the government is taking a huge hit in the polls as a result.

There are multiple causes contributing to these price rises — the war in Ukraine, supply chain disruption due to Covid-19, and the vast sums of money hoarded by the rich during the pandemic and the lockdowns.

The Labour Government’s response has been to reduce fuel tax and public transport costs, and give a one-off payment of $350 to everyone earning under $70,000 per year — except, shamefully, for pensioners and beneficiaries who need that money the most. The Opposition National Party’s plan would be to abolish several taxes introduced by the current government, to adjust income tax brackets for inflation, and to abolish the top tax rate of 39% on income over $180,000, introduced by Labour last year. The Greens, meanwhile, are proposing a tax on wealth to deal with inequality and tax injustice, which they claim would only affect the top 6% wealthiest households.

Labour’s policies do not go nearly far enough. National’s plan would disproportionately benefit high earners, the people who need that money the least. The Greens, meanwhile, have the right idea — a wealth tax would go a long way towards moving the tax burden onto those who can afford to pay. But what if both National and the Greens have a point?

I don’t mean that both policies should be followed. The Green policy would make the economy more fair; the National policy would make things less fair. But the idea of implementing a wealth tax alongside tax cuts for ordinary people is actually a great idea if done properly.

The Tax Revolution of the 1980s

Let’s take a short trip back to the past. In the 1980s, Labour Finance Minister Roger Douglas introduced a series of sweeping right-wing economic reforms. His National Party successor Ruth Richardson followed suit with further major changes in the 1990s. Douglas and Richardson were the last truly transformative politicians in terms of the way our economy is run.

Tragically, they transformed the country in precisely the opposite direction to what was needed. Inequality and poverty exploded thanks to “Rogernomics” and “Ruthanasia,” as their regimes came to be known. They were part of a broader trend which made up the neoliberal free market revolution around the world, led by British Prime Minister Margaret Thatcher and US President Ronald Reagan. Inequality rose in every country which introduced neoliberal policies — though the speed and scale of the inequality unleashed in Aotearoa was one of the most extreme in the world.

According to Michael Fletcher and Máire Dwyer’s 2008 report to the Children’s Commissioner:

“Child poverty rates rose sharply in the late 1980s and the early 1990s. During this period, inequality rose more in New Zealand than in any of the 20 Organisation for Economic Cooperation and Development (OECD) countries for which comparable data is available. The key drivers were low wage growth for many working families, high unemployment and reductions in welfare payments.”

One of Roger Douglas’ flagship policies was the most radical tax reform in our nation’s history. He slashed the top rate of income tax from 66 cents in the dollar to 33; he reduced company tax from 48% to 28%; and in 1986, he introduced a brand new tax, the Goods and Services Tax (GST), initially at a rate of 10%. It was raised to 12.5% by his ally and successor David Caygill in 1989. This transformed our tax system from a fairly progressive system to an extremely regressive regime, with high earners and corporations contributing far less than before. GST has been increased once since then — National Party Finance Minister Bill English increased it to 15% in 2010.

Righting the Wrongs of the Past

The benefit of GST is that it is a very easy tax to collect, which is useful for government bureaucrats. It is a very difficult tax to evade. However, it is also a clear driver of inequality. Poor and working class people spend the highest percentage of their income on goods and services.  The ultra-rich, on the other hand, spend the lowest percentage of their money, and instead either save it, or invest it in assets such as housing, generating even more money for themselves at the expense of everybody else. GST is the very definition of a regressive tax.

GST should be abolished with immediate effect. And it should be replaced with a wealth tax.

This is a radical proposal. It would be a reform almost as significant as Roger Douglas’ 1980s tax overhaul. But it is also a common sense solution.

Firstly, it would deal in a big way with the crisis of inequality. The vast majority of people, whether poor, working class or middle class, would benefit. Spending on goods and services would increase substantially — a huge boon for the economy. But those on the lowest incomes would benefit the most, with their purchasing power suddenly, and dramatically, rising. This would drive down inequality and poverty. More action would be needed to deal with these deep-rooted problems in our society, but it would be a start.

Secondly, and directly relevant to our current situation, it would dramatically negate the cost of living crisis. Abolishing GST would reduce the cost of all goods and services by 13% — meaning prices would return to 2018 levels. This would reverse the negative effects of inflation substantially. It would mean that people can keep spending rather than having to cut back.

This would certainly be a massive task for the government to undertake. Last year, the government raised $27.2 billion from GST alone. The Green Party’s proposed wealth tax was estimated in 2020 to be worth $7.9 billion in its first proposed year of implementation. Such a wealth tax would pay for a 29% reduction in the current rate of GST — which would be a good start. But a much steeper and more progressive wealth tax is both possible and necessary.

In 2021, the top 10% of New Zealanders held over half of the country’s wealth. The top 5% held 37%, and the top 1% held 15.8%. Meanwhile, the bottom 50% of the country held just 6.7%. This is based on estimates which inequality expert Max Rashbrooke says may be wildly inaccurate; he told Stuff:

“[Rashbrooke] said there was a caveat in that the very richest people in the country refused to be part of surveys. The 1 per cent might in reality have more like 85 per cent of wealth than 20 per cent, he said.”

From stuff.co.nz

This means that the top 5% of Kiwis have at the very least $628 billion in net worth between them, an average of $6.7 million per household. That is an obscene amount of money, especially given how little the bottom 50% have. To redistribute that wealth is an urgent moral necessity, especially in the face of the current cost of living crisis.

To raise the $27.2 billion needed to replace annual GST revenue, we would need to take away just 4.3% of that wealth. It can be done, and it must be done.

Such a policy would take a lot of bravery from the government. It would be a u-turn from Jacinda Ardern’s ongoing stubborn refusal to implement any tax on wealth. It would mean taking on the wealthiest and most powerful people in Aotearoa. That is never an easy feat, and would guarantee the majority of business, media and the ultra-rich elite turning against her.

However, this policy could also save Ardern. It would have massive financial consequences for everyone in the country — it would be a tax cut for the bottom 94%. This would surely be felt keenly by wavering voters currently considering opting for National instead of Labour. It would indicate clear, strong action on the cost of living emergency. That would only be a good thing in electoral terms.

It would allow Labour and the Greens to permanently reframe the debate on tax. In response to National and ACT accusing them of being parties who want to raise taxes for ordinary New Zealanders, the centre-left parties could throw back in their faces the fact that in reality, the government just gave a huge tax cut to the majority of the country, whilst making National’s wealthy mates pay for it.

It would mean Labour would finally be delivering on their rhetoric of being a kind, transformative government, as they would be seriously addressing poverty and inequality in a meaningful and lasting way — which they have not yet done. It would begin to redress the decades-old injury to this country’s social fabric inflicted by the Fourth Labour Government, and mark a clear break from the era of Rogernomics — which would be fitting, given that as Leader of the Opposition in 2017, Jacinda Ardern proclaimed that “neoliberalism has failed.”

Regardless of whether or not Labour or the Greens were to take up this solution, it is the kind of policy the left should be fighting for to demonstrate that there is a radical alternative to this moderate centre-left government other than the austerity and tax cuts for the wealthy offered by the right-wing parties as a false solution to this crisis. Further accelerating inequality will only ever make things worse. Another world is possible, and the left must fight for it.



This article was originally published on 1of200.nz, and has been republished with their kind permission.

Elliot Crossan is a socialist writer and activist.

29 May, 2022

Posted by Elliot Crossan in Green Party of Aotearoa New Zealand, New Zealand Labour Party, New Zealand National Party, New Zealand politics, 0 comments