If you didn’t yet know, the Budget should drive it home: give up on tax relief. Michael Cullen’s message is to tap into the burgeoning business assistance programme — and to lift productivity.
Cullen spent a whole page of his 15-page speech arguing that this country’s company tax was not out of line with OECD rates and less burdensome than Australia’s.
Yes, he said, company tax receipts here are 11.3 per cent of total tax revenue compared with the OECD average of 9.4 per cent. But at 3.8 per cent of GDP it is only slightly above the OECD’s 3.5 per cent. In Australia, he said, company tax is 14.9 per cent of tax revenue and 4.5 per cent of GDP. Moreover, Australia and much of the OECD have substantial payroll taxes and a general capital gains tax which New Zealand doesn’t.
So don’t expect company tax cuts while he is Finance Minister unless OECD rates drop substantially.
Cullen also spent some time at his press conference comparing the impact on lower-income households of his direct assistance unfavourably with the help they would get from income tax cuts, either in the rates or by raising the thresholds.
So don’t expect income tax cuts either.
In fact, what he has done is to redistribute past gains from rising tax takes. It is a massive redistribution to poorer households.
And he has drastically narrowed the options for future governments. In his version of Sir Robert Muldoon’s famous “I’ve spent the lot” in election year 1972, he said bluntly that “there is very little room for any further substantial fiscal loosening”.
There are, in fact, two escape routes — but they are routes National is unlikely to rush to take up. One is to can the $2 billion-plus going yearly into the super fund. The other is to reverse his new commitment to get gross sovereign debt down to 20 per cent of GDP, not far below the 22.6 per cent projected for mid-2005.
Only two years Cullen set his gross debt target at 30 per cent. By lowering his target he has limited his own scope for borrowing to fund infrastructure and other capital projects — especially since his massive social spending programme, including the “working for families” package, initially pushes gross debt up.
But National does have some rhetorical room which leader Don Brash used in his speech in Parliament yesterday to accuse Cullen of squandering the tax-cutting opportunity afforded by his accumulated surpluses to stimulate growth that way.
Brash noted that Cullen has long since stopped talking of getting New Zealand back into the top half of the OECD, which requires, according to the Treasury, a 1 per cent lift in the 3 per cent trend growth rate projected in the Budget.
Cullen instead made a point, noted by the Greens, of saying that New Zealanders do not live by GDP growth alone: they “rightly believe that success is defined as much by quality of life, a better environment and more effective health and education services as by narrowly defined economic performance”.
Those criteria just happen to be Labour’s preoccupations.
What does it leave for business? A raft of assistance measures of variable quality and focus, increased spending on research and some measures to help firms lift productivity. Some business will get something out of that.
Next year there will also be more spending power in the hands of 300,000 of the sorts of households which spend most of what they get. That should counter the growth slowdown the Treasury expects to be under way this year.
Business will also benefit if the “working for families” package works — that is, gets more beneficiaries work-capable and seeking work and, over time, eases the labour shortage. And the Budget’s 2007 boost for pre-school education might make it more likely more children get a better start in life and are more work-ready when they leave school next decade.
Moreover, the Budget is fiscally sound, assuming the projections are right. That is reassuring for investors. The Reserve Bank does not need to be trigger-happy with interest rates.
But the die is now cast. Labour is being Labour, redistributing income and, as Steve Maharey likes to put it, “opportunity” to the less well-off. Business pays.