For most of their time Helen Clark’s Labour-led governments have had good luck in the economy. Now the luck has turned. Tough on Michael Cullen in his ninth (and last?) Budget.
Clark and Cullen benefited from the higher productivity growth delivered by the pre-1999 economic reforms and from a buoyant international economy.
Both have turned down. Productivity growth slowed as rising employment sucked low-producing workers into the economy and business was regulated more. Now the international economy is slowing in the wake of the credit crunch.
The credit crunch is a product of loose money under a United States Federal Reserve Board chair, Alan Greenspan, who thought low inflation was fine even though China and computerisation could have generated a benign deflation, as mechanisation did in the late nineteenth century.
Loose money helped stoke the dotcom bubble, then the house bubble. Some loose money ended up here, where interest rates were higher and borrowers were keen for a house bubble of their own and keen to spend.
The house bubble has popped. Spenders can no longer borrow against magical rises in their houses’ “value”. Petrol and food prices have soared. China has its own producer price inflation, so consumer goods price deflation has reversed into inflation.
The price of the debt households piled up (to lead the world) has also climbed. The average household is spending nearly twice the share of disposable income on interest as in 1999.
Debt kept the party going. There was enough feel-good for Clark and Cullen to scrape a third term in the Beehive.
Now the party is over. Clark and Cullen, having enjoyed the revels, must endure the hangover.
And Bill English and John Key, having watched the party noses against the windowpane, might rue that worse may be yet to come. The exchange rate has fallen 6 per cent in three months as foreigners register the seriously bad external deficit and high country debt. Prices of imports are rising.
Spare a thought for Cullen’s dilemma in past Budgets. If he had pooped the party, his party might not have got a third governing term.
In fact, to some extent he did try to poop the party. Surprised year after year with more revenue than his Treasury projected, he ran up huge operating surpluses despite spending more. He tried vainly to explain to the partygoers that in good times surpluses were prudent, leaning against irrational exuberance, the fiscal automatic stabilisers at work.
The prudent rule is: don’t spend surpluses if they are the product of a high in the economic cycle because chronic, or structural, deficits (as we had before the 1980s reforms) might result when the cycle turns down; only if surpluses are structural, the result of a step-change in economic activity, is it safe to dole them out.
In 2005 Cullen bent. Key and Don Brash flung tax cuts around with panache. Cullen and Clark sloshed out money in a fierce election auction, which they won. They justified that by claiming the surpluses (which in fact continued) had become structural.
Had they? Economic historians will tell us in time. Given that debt was a big part of the good times, there is cause for doubt.
This year Cullen has had to write a Budget against a starkly different public mood and economic backdrop from those of 2005. With less lolly, he must cut taxes to soothe the post-party headache and also spend on pitches to woo voters back.
Working for Families is banked, with scarcely a thank-you. Even low-income workers now want actual cuts, through lower rates or higher thresholds. Rising incomes have thrust ordinary families up into the 33c bracket and one-sixth of households into the “rich” 39c bracket.
That has been a tax increase by stealth. Cullen has done that for eight Budgets.
The big spending bribes in 2005 — and, to be fair, the building of social services and the start on reducing the 1990s infrastructure deficit, both demanded by voters — were paid for by this subterfuge, just as Australia’s tax cuts have been. As Paul Goldsmith notes in his useful new history of tax in this country, Sir Roger Douglas used the same dodge to soft-sell his massive tax rejig in 1986.
No such massive rejig has been signalled for Thursday. That, if it is to come, must await a different government.
But will any government abjure the play-acting of tax cuts that aren’t and do what Cullen half-did in his 2005 Budget before reneging a year later: index thresholds to wages over time to stop stealth tax rises?
Maybe, but don’t bet the bank. The Budget is a valuable political instrument. So is tax.
* The climate leadership forum did not specifically recommend delaying the phase-out of free allocations, as this column said last week. Instead, the government justified its delay on the thrust of its recommendations.
Note also National’s switch to delaying the emissions trading legislation until 2009, contrary to what I was told before the column. There were no bipartisan clues from Key on Sunday.