The Key message: grow the revenue

Grow the revenue. That will be a core message in John Key’s speech tomorrow opening Parliament for 2010.

That is not a tax story, growing government revenue. It is an economy story, growing the country’s revenue. Workers don’t get rich by being fired to make a company lean and mean. They get rich by being hired by companies which make more for each employee than they were getting before.

So officials have beavered for months on an “economic growth agenda”.

Of course, there is a tax story, too, though sources say we are not likely to hear the full plot from Key tomorrow. He and Bill English reached agreement last month on “directions”, then talked the cabinet into coming in behind.

The timetable is for cabinet signoff of the detailed reform package in April for inclusion in the May 20 budget. It is still not settled whether the budget will enact the whole package or whether it will enact some things and point to more changes over time.

Before then the broad thrust is likely to be tested publicly through speeches and other communication channels. Selling the package will test the leadership’s political management skills. (If there were national education standards for political management, wee Johnnie’s parents would be getting a “he must try harder” message for his too-long-delayed rescue of Anne Tolley.)

If Key and English do try for serious reform to fix a tax system they have been told by their working group is “broken”, they will need to engineer a soberer and subtler public discussion than hitherto.

A tax change has an immediate effect — some win, some lose, some or most win here and lose there — and a dynamic effect — over time there may be a benefit to all or most people from a more efficient and expanding economy as one result of a more efficient tax system.

To sell down-the-track benefits to sceptical and fearful voter-taxpayers, ministers have to finesse interest group scaremongering about the immediate effect — epitomised in the New Zealand Herald’s January 20 front paging featuring “land tax” in large, scarifying red type.

It helps to have fiscal leeway. When Sir Roger Douglas introduced GST and cut income tax in 1986, he had a lot of accumulated fiscal drag he could use to compensate all immediate losers. English has minimal fiscal leeway. So no “lolly scramble”, as one minister puts it.

But English also has to attend to a seriously broken 2008 election promise of income tax cuts this year and next. Paying for such cuts requires the tax base to be broadened, most likely through some measures on property and a GST rise, which in turn will need some compensating payment and/or tax rate cuts for lower income earners.

One fix for this conundrum is to “grow the revenue”. This is not an answer in itself because if much of the proceeds goes to the few and the many feel little better off — as has largely been the case over the past two decades — that can prompt voters to float.

But growing the revenue gives more options than not growing it. And it has the political benefit of appearing to do something — “concrete activity”, one minister calls it.

So Key and Gerry Brownlee and officials have been looking at where to pour concrete. That has taken the form of an analysis of economic sectors and cross-cutting factors that effect those sectors.

At one point before Christmas this took the form of a dozen or so A3 sheets of paper, each covering a sector. The aim was to identify growth opportunities and what cross-cutting or other actions the government could take — or stop taking — to improve the possibility private investors will exploit those opportunities.

Among the sectors in focus are minerals and petroleum, which Brownlee says promises a bonanza, aquaculture, which stagnated during Labour’s years, high-tech manufacturing and high-tech services and export education. Clean-tech was not included. Ministers insist this is not picking winners but identifying where the growth opportunities, if any, are in each sector.

Cross-cutting factors include research, science and technology, on which reports are due this month, irrigation to boost land-based production, skills, infrastructure, regulation and tax. Expect a lot of activity in Simon Power’s commerce portfolio: his agenda this year is bigger than last year’s.

Overall, this amounts to an “eclectic mix”, one minister says. It involves ministries and other agencies working together in ways they have not in the past. And it will not be a once-for-all strategy but an ongoing “constant stocktake”.

The aim is higher-paying, not just more, jobs. Mining pay is five times the average. Pay for milking cows or tourists isn’t. Ministers believe that getting the regulatory, tax and government spending settings up to world best practice is not enough on its own. Hence their dismissal last year of the Brash report.

There was too much ideology for Key in that report. Tomorrow, according to advance billing, we get “what works”. Oh, and tax.