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Minimum wage increases vs. tax cuts – what really boosts the economy?

This election, Labour and National have set out very different proposals for growing our economy and supporting New Zealanders through our COVID recovery. But when it comes to real results, the experts are clear – only our plan will keep New Zealand moving.

As part of their economic plan, National has proposed emptying the COVID-19 Response and Recovery Fund and scrapping next year’s minimum wage increase to pay for tax cuts that largely benefit the wealthy.

This is not only irresponsible, as it will mean raiding the reserves set aside for a potential future outbreak of COVID-19, but it’s also not that effective.

Studies show that the best way to boost economic growth is to give more money to those on lower incomes, as they are more likely to spend it. This stimulates the economy by putting cash back into local businesses, rather than leaving it tied up in banks or other funds. But National’s plan does just the opposite.

Under National’s proposed tax cuts, it’s the people on bigger incomes who reap the rewards. Someone on $30,000 a year would only receive $8.10 a week in tax cuts, while a person earning $90,000 a year would receive $58.10 a week - over seven times more.

Scrapping the minimum wage increase would also cut cash from the pockets of our lowest paid workers, leaving them far worse off under National than they are now, and far less likely to spend and stimulate economic growth. This goes against what economic experts, like the International Monetary Fund, recommend.

“Drip-feeding more cash to those who need it least is both inequitable and an ineffective way of stimulating the economy,” Interest.co.nz’s Jenée Tibshraeny explains. The reason? Because those on lower incomes are more likely to spend any additional money straight away on necessities they’ve not been able to afford, instead of higher earners, who are more likely to put the money aside for another day.

This is why Labour has set out a different approach, one that invests in our people while keeping New Zealand moving. Under our plan, the minimum wage will rise to $20 an hour next year. This will give full time workers on minimum wage an extra $44 a week, or $2,288 a year, before tax. It will give our economy a much-needed boost, while ensuring our workers receive a fair day’s pay for their hard work.

As the world continues to deal with the economic impact of COVID-19, there are challenges ahead. Increasing the minimum wage isn’t a silver bullet – instead, it’s one part of our wider plan to support New Zealand’s economic recovery, while making sure we continue to work on long-term challenges like inequality. Labour’s plan will create jobs, support small businesses, and grow the economy while responsibly managing debt and ensuring we protect our essential services like health and education.

You can read more about our plan, which is already in motion, here.