Jacinda stumbled into a $520bn minefield
Jacinda Ardern's 'captain's call' to consider introducing a Capital Gains Tax in her first term was the strategic error that may have cost her the Prime Minister's job for at least three years. Bernard Hickey analyses that near-fatal decision and why it was so dangerous to even touch the hair trigger of the most explosive issue in New Zealand's political economy.
If only she had known how big a minefield it is, she might have made a different decision in her second week in the job.
Flushed with the success of her first week in charge of the Labour Party and a building wave of 'Jacinda effect' support, Ardern decided her 'relentless positivity' and an ambition to really deal to the housing crisis convinced her she could venture forth into a capital gains tax debate.
Her predecessor Andrew Little had decided that Labour's campaigns for a CGT (excluding the family home) in 2011 and 2014 had been one of the 'big hairy' policies that had scared middle New Zealand off voting for Labour. He also ditched Labour's plan to increase the age of eligibility for New Zealand Superannuation. Ardern kept the policy of leaving the age of eligibility at 65, but decided that her generation needed to know she was serious about addressing the housing affordability crisis.
If only she had known what she was dealing with, she might have made a different decision in those days before agreeing with Grant Robertson to let it be known in his debate with Steven Joyce on The Nation on Saturday August 12 that Labour would not rule out a CGT in its first term.
It seemed harmless enough at the time.
The exchange on The Nation that Saturday morning just 11 days after Ardern was elected leader looked like a statement of the obvious that was designed to fly through the keeper.
Asked by Lisa Owen if he could rule out a CGT in Labour's term, Robertson said: "We’ve got a tax working group. I can’t pre-empt what they’re going to come back and decide."
Sensing he was tip-toeing into the minefield, Owen pressed again: "So you can't rule it out? Could come in the first term?"
'Careful where you step'
Watching Robertson's response was like watching someone look over their shoulder while walking forward into a field marked "Mines. Danger!"
"I can’t pre-empt what that group says, but here’s the important point — right now today we have something called the bright-line test that the National Party brought in. It says that if you sell a house that’s not your family home within two years, you’ll pay tax on it. Steven has a form of capital gains tax."
The attempt at distraction only served to pique Steven Joyce's interest. In that moment, Joyce knew he had found a way to disarm the 'Jacinda Effect.'
Immediately, he pounced, setting out National's entire election strategy in one statement on the hoof.
"I think there’s a problem there for the Labour Party, because they’re dodgy on tax. They’re refusing to say about the capital gains, they’ve mentioned a water tax last week, but they won’t tell us how much it is, and then, of course, they’ve got a regional fuel tax they won’t talk about where it goes beyond Auckland," Joyce said.
Within days, Joyce was talking about Labour's 'seven new taxes' and directing his ad agency to focus National's attack on Labour's tax plans. In the last two weeks of the campaign, National's attack ads on tax flooded the nation's Facebook news feeds and successfully caused National's rebound in the last two weeks.
Within two days of Robertson's soft reversal of Little's CGT first-term-rule-out, Ardern confirmed that she had endorsed the change in strategy from her predecessor.
I remember, slightly dumbfounded the next week, asking Ardern why she was taking the risk of poking the capital gains beast when Labour's own (very clever) policy was to extend National's two-year capital gains tax to five years. That would effectively tax capital gains by landlords in the first five years without prompting an attack from National, who could not credibly attack an extended version of a policy they had introduced themselves.
Ardern's argument was that housing affordability was an urgent issue and she could not afford to wait to help a generation locked out of the housing market.
"I am maintaining our right and ability to act on its (the working group's) findings and do the right thing when we’re in government. We’re yet to know what that will be though,” she told reporters on the Tuesday after Robertson's Saturday morning comments.
“I’ve been very, very transparent on this. We do not think that assets are treated fairly, relative to other forms of taxation in New Zealand. The fact that someone can go out and work a 40-hour week and pay tax on that, while someone can own multiple homes, flick them off for capital gain and is often not treated in that same fair manner, is something that needs to be addressed,” she said.
“Most countries have. New Zealand sits on its own in that regard."
Ardern again made clear it would not apply to the family home, but the genie was well and truly out of the bottle by then.
Why is it so explosive?
People often under-estimate what is at stake in the debate about CGT.
They essentially don't understand how New Zealand's households go about building wealth and arranging their finances. It's an easy mistake to make if you don't own property and you've never built or owned your own business, which Ardern has not done. (She has only recently bought a home with her partner Clarke Gayford).
The family home is at the centre of the New Zealand household's financial thinking. The numbers are enormous and are the most powerful force dragging on any attempts at changing the trajectory of New Zealand's political economy. Regular workers can earn twice and three times more just by owning property than they can from a real job, where they have to pay tax.
'Don't you dare touch my capital gains'
There is so much to lose for property owners, who vote at much higher rates than renters, and for New Zealand's 450,000 small businesses with one to five employees.
The numbers are astonishing and should have been laid out in front of Jacinda Ardern before she decided in a moment of 'Jacinda effect' confidence that they could be overcome.
Just have a look at table C21 in the Reserve Bank's series of statistics on household wealth. It shows that household net wealth rose $520 billion between September 2008 and the March quarter of 2017. That was largely because of a $320 billion rise in the value of housing and land - none of which was taxed. Some of the rest were rises in the value of capital in businesses, which is untaxed.
It is the dirty little secret of New Zealand's financial life. There is much more money to be made - tax free - by buying rental property funded by bank loans than by actually working in real jobs. The leveraged returns over the last two decades have increased household net worth from $427 billion in September 1999 to $1.38 trillion by March of 2017.
That is trillion with a 'T'. That $1.38 trillion is 5.1 times GDP. The gains since National was elected in 2008 are equal to twice the GDP of the country. Over 60 percent of New Zealanders own property and they know their net worth in their bones. It's no accident that homes.co.nz has become a very popular site because it allows home owners to effectively check their net worth daily as their property values rise.
Going for the CGT jugular
Joyce and English sensed the vulnerability and quickly engineered a campaign to highlight the potential risks of a capital gains tax for small businesses that are funded off the family home and for families who depend on the inheritance handed on when an elderly relative passes on.
They then leapt on the possibility that Labour's Tax Working Group would suggest a land tax. They knew this all too well, given their own 2009 Tax Working Group had recommended just such a land tax.
Bill English used a trip to a Lower Hutt retirement village, Ryman Healthcare's Bob Scott complex, on September 5 to ram the point home.
English said Labour needed to be clearer about its position on tax so Kiwi voters could be fully informed.
“You take a group like this (referring to the Bob Scott residents), superannuitants all own their own houses, a lot of them own their own houses, but they don’t have much income," he said.
“They already pay rates and now the Labour leader is floating the idea that there’ll be a land tax on top of your rates."
Within hours, Ardern had to rule out such a tax.
Here comes an inheritance tax
Less than a week later, English highlighted the risk that a Capital Gains Tax could turn into an inheritance tax. He did that while talking to vegetable packers in Levin - many of whom could only ever aspire to home ownership and the windfall capital gains that have come with it.
The idea is that the family home exemption would evaporate upon death. It was an easy accusation to make in the vacuum left by Ardern's reliance on the un-made recommendations of the unformed tax working group.
"I presume, for instance, for the inheritance tax - which has widespread impact because it's for every family where the parents die and leave the house - every family whose older parents own a home when they pass away - it now looks like Labour is entertaining the idea of an inheritance tax on that house," English said with a smile.
"If they bought it 20 years ago for a couple of hundred thousand and now they can sell it for a million then how's it going to work?
"Labour should be upfront with the public. What they're asking the public to do is to vote for a committee in this election to decide one of the most critical issues for our economic success, and that is how the tax system works.
"They're asking New Zealanders to hand them their ATM card and they'll give it back in a year when they've decided how to spend it."
“New Zealanders need to know what they mean by that, otherwise Labour is asking for New Zealanders to give them a blank cheque, that is, ‘Vote us in and we can think of any tax at any rate and you have to pay it, and by the way what we’re spending it on we can’t really show it will make any difference’.”
Again, within hours, Ardern and Robertson ruled out an inheritance tax.
The reversal of a captain's call
By September 14 the pressure was intense and the weight of that $520b of untaxed capital gain became too much for Ardern to bear. She reversed her captain's call and said voters could say in the 2020 election whether legislation for a CGT excluding the family home would apply after the election. She had essentially adopted Little's stance again.
No doubt Labour's focus groups and internal polling showed that the dirty little secret of New Zealand life was too dirty to be laundered in public and through the tax system.
"I think it was a crazy brave thing to do," said Stephen Mills from Labour's polling company UMR of the CGT captain's call.
"When I first heard about it (leaving open a CGT in a first term) I put my head in my hands and made a secular prayer that I hadn't heard what I'd just heard," Mills told Kathryn Ryan earlier this week.
Ardern's captain's call was all designed to buy Labour and Generation Rent another six to 12 months of time of a CGT to influence the behaviour of property buyers.
In essence, the political risk was not worth the reward.
Those attacks on Labour's CGT plans through mid to late August coincided with a rebound in polling support for National. They cost Ardern the election.
If only she had known she was attacking $520 billion worth of wealth, she might have thought more than twice in her first week in the job that it was worth the risk.