Bill English changed the rules for many people’s tax games in his 2010 budget. But did it change the big game — in economic potential or political advantage?
Business Roundtable chief Roger Kerr said it would not step-change the economy. He wants much smaller government and much less regulation.
English himself told the media on Thursday the budget was not “hairy-chested”, as some wanted (meaning Kerr, ACT and a National fringe). He was a new, dazed backbencher in 1991 when National popularity crashed on Ruth Richardson’s hairy-chested “mother of all budgets”.
Back in January John Key and he ruled out a land tax and a comprehensive capital gains tax and flagged moderate moves on property investment income, in part in line with officials’ advice on the practicalities. On company tax the initial grapevine word was that they would not cut unless Australia went below 28 per cent — later did Key push a cut.
“Fairness was ruled in: lower-income people were not to lose out from the rise in GST. To do that English has had to push core spending above Labour’s levels to 35 per cent of GDP.
Longer-term, if the English limit on new spending of $1.1 billion plus inflation stays in place, core spending will fall to 28 per cent of GDP. But there are four elections before then and Key is very poll sensitive. In the next four years spending is forecast to be around the level of most of Michael Cullen’s years. That is not radical.
Consequently, the budget will not of itself undo the deep distortions in the economy. English told journalists on budget day the income tax changes will affect savings and investment behaviour “at the margin”, even though they were in part designed with the expectation that the better-off who get most of the loot will save and invest some of it.
That is not a step-change to remediate the borrow-and-spend habit of the past 15 years. Net indebtedness to the rest of the world — mostly for consumption or houses — leaves us vulnerable to global disturbances and both Key and English have been warning there might be more such shocks. English sees hope in the recent small lift in borrowing and saving but if the economy grows at the Treasury’s comforting 3 per cent a year, people might get back on the credit card.
English rejects direct action on saving. He cut support for KiwiSaver last year and won’t reverse last year’s suspension of contributions to the Cullen future fund until the budget is back in surplus. Australia forces employers to pay 9 per cent of employees’ earnings into superannuation accounts and is raising that to 12 per cent. Those accounts have helped fund the productive investment that has driven Australian wages far above wages here.
English and Key remain misers on long-term investment through research, science and technology: new spending there is one-ninth of the tax switch’s $460 million cost in 2010-11.
So is the budget an economic game-changer? Answer: no, whether from the Business Roundtable’s angle or the Council of Trade Unions’.
Of course, the budget is not the only economic game. Coming are minority sell-offs of some state-owned enterprises to deepen the thin capital markets. There is more rigorous scrutiny of regulation and more to come. Gerry Brownlee has talked up an Australian-scale minerals bonanza.
But SOE selldowns are post-2011, Key has backed off a long way on minerals and most development talk is of “more” rather than “smarter”. This is an incremental approach, accumulating change over time, with voter support, not a shock-and-awe leap into the future.
Likewise in politics: incrementalism is a game-changer at most by stealth and over time.
Initial polls on the budget were a large “for”, though with reservations on the GST rise. The income tax cuts will lock in National-leaners and, if they help deliver higher real incomes, might over time keep onside the 2008 recruits from Labour. That would give Key an opening to reshape politics in a second or third term more deeply than his smile has done so far.
But that is longer-term. Right now has the budget opened up a game-changing opportunity for Labour?
The many small cuts in services, each with a constituency, are one factor. And if prices outpace wages for too long, Labour’s line that “tax cuts for the rich” are pushing up inflation, forecast to hit 6 per cent, might resonate in the middle ground.
Actually, apart from the GST-driven 2.22 per cent on October 1, for which most everybody is compensated, and the tobacco tax rise, which Labour voted for, the rest is due to economic forces plus 0.4 per cent from the emissions trading scheme — less than from Labour’s ETS.
But inflation is inflation. Services cuts are cuts. There is a chance Labour may get traction. That could be game-changing.
But tax cuts are also cuts. And if savings from tax cuts do lift the economy, National will stay in charge of the game. And if it does, it will change the game — but incrementally, so you hardly notice.