Domestic inflation isn’t the problem any more. So Michael Cullen feels free to dollop out tax cuts and to run a Budget that stimulates the economy to the tune of a bit over 2 per cent.
He is banking on the Reserve Bank agreeing with him on domestic inflation and looking through imported oil, food, transport and consumer goods inflation, magnified by the now-falling New Zealand dollar.
So it is conceivable that voters in October will get both tax cuts and interest rate cuts to (partially?) offset likely continuing rising prices.
That is unlikely in itself to turn the political key to the election. The Budget was delivered against a black public mood. At most it might lighten the black a little.
What Cullen has attempted is to box in National so that it cannot offer significantly greater tax cuts, at least initially. He argues, with some reason, that he has gone to the limits of looseness with a cash deficit of $3.5 billion and a slim operating surplus that could readily flip into deficit if the economy goes worse than the Treasury’s relatively optimistic projections.
If Bill English is to offer a tax programme that is as fiscally credible (and creditable), as John Key could in 2005 when the operating surplus was sky high and there was even a significant cash surplus, he will have to focus on the longer-term future and the promise of a lighter tax load and faster economic growth after the whole tax system is restructured.
The saver for English is that he doesn’t need to promise much more. He can offer a bit more by promising “savings” in the public service. Cullen has attempted to counter that with lower projections of future additional spending ($2 billion a year down to $1.75 billion) which he says will require significant “reprioritisation”, Beehive code for a thousand small cuts.
That is the immediate politics. Cullen has done as well as anyone could in this Budget, given his party’s social priorities and the policy settings he started from.
The deeper issue is the legacy of Cullen’s nine Budgets. This in three parts.
The political legacy is a fiscal policy that over nine years heavily favoured building public services, particularly health, and improving income support for the least well-off, the old and, more recently through Working for Families, wage-and-salary-earning families with children.
That was traditional Labour stuff. Sir Walter Nash, the only Labour Finance Minister to have delivered more Budgets than Cullen, would have recognised that priority, even if he would not have understood half the terminology.
The other side is a higher personal tax burden. Nash would have recognised that, too. But there comes a time when ordinary folk object. Cullen was too much of a Labour traditionalist to get the modern tax-spend balance right until too late for his political health.
The second legacy is a strong fiscal position, in part the result of unexpectedly high revenues but also of Cullen’s resistance to spending the surpluses or giving them back in tax cuts. Cullen correctly argues that there is fiscal scope to offset the worst effects of the current economic slowdown — as National argues, government debt could safely rise a bit.
Even given its switch from cash surplus to cash deficit, the Budget’s projections of revenue and spending are remarkably stable — and comparable with what Cullen inherited in 1999.
The third legacy is economic. That is a more complicated calculation.
The Clark ministry recognised before it came into office in 1999 that to achieve its social ambitions it needed a stronger economic base.
So it developed strategies, frameworks and roadmaps. It also recognised productivity had to rise or real wages could not (at least, not sustainability). More strategies and frameworks.
The record is mixed. There are jobs galore, but not at higher wages. Some initiatives have helped firms expand and export and, given a few more years, more generate more such benefits.
But productivity, except by some accounts in the past year as business investment to counter the tight mid-2000s labour market has begun to deliver, grew more slowly than in the 1990s — and more slowly than in Australia. That is part of the reason for the worrying exodus.
Cullen skimped on science, which might have been delivering a dividend by now. Tighter regulation and higher taxes didn’t help either and the tax and regulation improvements for business in recent years have yet to deliver a dividend.
Can National do better if it wins in October? And, if so, will that “better” be no better than the economy will do if Labour wins in October? Key and English have so far offered broadband and lower tax as answers to that question, with a higher priority on science still to come. Much more is needed.
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Piece for NZ Herald online 3pm 22 May
Michael Cullen usually plays golf. In today’s Budget he switched to snooker. There is no room, he crowed, for more fiscal loosening.
He has set out to leave no room for early bigger tax cuts without increasing borrowing above his large $3.5 billion — “the limit of my comfort zone” — and/or cutting government services.
He even tightened the screw a bit by cutting the provision for extra spending by $250 million to $1.75 billion a year — which he said would require public services to “reprioritise”, Beehive code for small cuts here and there.
Has he snookered National? “Budgets don’t win elections,” he told the media lockup. He’s right. When Sir Robert Muldoon said he had “spent the lot” in 1972, he nevertheless went out in a landslide.
At most Cullen has held the line, doing the tax cuts he had to (around the level of forward inflation). The public mood has turned very black. His opponents will finesse him by promising a fine-sounding “restructured” tax system.
But, if this is his swansong, he can say he rebuilt social services, kept the accounts in very strong shape — and, having step-changed up the tax burden, is now stabilising it. In Labour terms, a fine record.