Kiwiblog

First of all kudos to Bill English and Treasury for getting rid of the old rolling embargo that was in place for previous budgets. This meant you could not blog a specific item until the Minister of Finance read it out in his speech. It made blogging and reporting very hard as it was not always clear whether the part you wanted to cover was even in the budget speech, let alone when.

So now it just a simple 2 pm embargo which means I can just hit publish at 2 pm, which I have done.

Deficits and Debt

The fiscal parameters inherited by Labour meant gross debt was tracking to reach 48% of GDP by 2013, and 70% of GDP, or $227 billion by 2023 – equal to $180,000 of debt for every household of four. There was a very significant structural deficit. This is because the economy will have $50 billion less output over next three years than forecast in the 2008 budget.

The status quo would have meant future generations would face either massively higher taxes, or cuts in health and welfare spending as more and more money would be spent on debt servicing. Debt servicing would have increased to $14 billion a year – more than current Vote Health.

The measures outlined in the 2009 budget are forecast to have gross debt peak at 43% of GDP in 2016/17 and then decline to 37% by 2023 – almost half the 70% on existing parameters.

The projected deficit for this upcoming year is still a very large $7.7 billion and next year looks to be $9.3 billion, before gradually reducing. So the Government is borrowing a lot of money to help keep people’s incomes and jobs steady.

Labour budgeted for $1.75 billion a year of new spending initiatives. National is reducing this to $1.45 billion for this year and $1.1 billion in out years. This is pretty reasonable – in the late 1990s it was only $600 million a year. However it will pose some real challenges in around 2011/12. For the next two years expectations will be lowered due to the global recession. People are accepting zero wage increases etc, and lobby groups know now is not the time to ask for lots more money.

But in two to three years, with the recession behind us, there may be a lot of pressure for new spending beyond the $1.1 billion. Inflation and population growth alone can take up a fair bit of that. We will still be running large deficits, but the economy will be growing and the Government will come under real pressure.

Spending Initiatives (generally all over four years)

• $323 million for home insulation – grants of up to $1,800 for most households and up to $3,000 for community service card holders
• $3 billion for Vote Health, being $2.1b for DHB services, $70 million for 800 more health professionals, $130 million for maternity services and $245 million for 20 new elective surgery theatres
• $1 billion in new spending including $523 million on new schools and school upgrades
• $900 million for Justice including 600 more police for $183 million, 246 more probation officers at $256 million and 1,000 more prison beds at $385 million

There is lots of little stuff also, but the Government has targeted most of the extra spending in a few key areas.

Jobs

Unemployment is forecast to peak at 8% in September 2010. I hope so, but suspect it may push 10% as I think the US and Europe are more stuffed than people realise.

The Government has committed $7.5 billion of infrastructure investment over the next five years through toad building, state house building and refurbishments, new and improved schools and broadband rollout. On top of that 600 more police, 246 more probation workers and 800 new training placing for health professionals.

Labour’s planned infrastructure/capital spend was $900 million a year – it has increased to $1.5 billion a year. Labour will claim more should be done for jobs, but in reality National is spending more on infrastructure projects than Labour would have. And the long term solution to jobs is having a competitive robust economy.

Reprioritisations

The line by line reviews have identified $2 billion of savings (around $500 million a year) that is being reinvested in frontline services. This means that that the $1.45 billion increase in operating spending will fund $1.9 billion of new initiatives.

As an example the Government has cut funding for adult community education hobby courses by $54 million, and increased special education funding by $51 million. Sounds like a good reprioritisation to me.

Also reducing support function expenditure at the Ministry of Education by $18 million to help fund a $36 million literacy and numeracy initiative.

Tax Cuts

Yes they are gone. The official Government line is deferred, but to no particular date, so I say they are cancelled. When tax cuts are budgeted again in the future, it will be a new package I suspect, not just reinstate the planned 2010 and 2011 tax cuts.

English said that it is highly unlikely tax cuts would be reinstated before the next election. He was asked if he would deliver tax cuts before the books were back into surplus (which is not until 2017), and he said the main thing they would look at is if the economy was growing strongly enough.

The deficits for the next two years, even without the tax cuts, is a combined $17 billion. They are a victim of timing partly. I did ask the Minister what their rationale was for deciding to break a tax cut promise rather than a spending promise such as interest free student loans, especially as he originally opposed interest free student loans but always campaigned for tax cuts. English responded that people feel insecure in a recession, and they made a decision not to cut any current entitlements to help confidence and security.

Several from the “right” congratulated me on my question, as no one else really pushed back much on the tax cuts vs spending issue. I was however amused to be berated by Miss Ten, who was attending as an analyst, for trying to get interest put back on her rather large student loan.

The $900 annual cost of the future tax cuts is around 20% of the total tax cut package. The Oct 2008 and April 2009 tax cuts are worth around $4 billion a year of foregone revenue and were very well timed in terms of fiscal stimulus. So at least we got $4 billion of the $5 billion!

In my words the main reason why they are gone is that they had not yet occurred. It is far less painful to cancel future spending or tax cuts, than to cancel existing spending or hike existing tax rates. Yes people get annoyed when they don’t get something promised, but they get more annoyed if you actually take away something they already have.

National did “pay” for the 2010 and 2011 tax cuts by reducing KiwiSaver subsidies by over $1 billion to compensate. The problem is that the fiscal position has changed so much since PREFU that anything not yet nailed down had to be sacrificed.

The problem for the Government is that while fiscally cancelling the tax cuts was the right thing to do, it makes their long-term closing the gap with Australia objective much harder. A low tax economy (with less tax churn) will generally grow faster than a higher tax economy (there is 40 years of OECD data to back this up).

The Government says it has a medium-term goal of a top company, trust and personal tax rate of 30%. I asked the Minister if he could define the medium-term and he said they were having problem even defining the short-term!

NZ Super Fund

As everyone expected, and as Dr Cullen himself said would be sensible when he set the Fund up, the automatic contributions are being suspended until there are surpluses again. The fund was explicitly set up to be funded out of surpluses. It was never intended to borrow for the contributions. So when you hear Goff and Cunliffe squeal about this, remember they are wrong.

The automatic contributions are likely to be suspended for 11 years, and this will prevent $19.5 billion of extra debt (plus interest). Once automatic contributions resume, they will be higher due to the Fund’s formula – $2.5 billion instead of $2.2 billion.

The Government is still going to make a voluntary contribution of $250 million this year. They seem to be tagging it for investment within NZ and to supplement the supply of capital to local businesses. This is very smart politically, but very dumb in an economic sense. However it was an election policy so no surprise.

Summary

There’s not much one can argue should be done differently. I would almost say the budget wrote itself, as the structural deficit and debt projections had to be dealt to. This budget knocks $100 billion off the long-term debt projection.

It is quite a canny mixture of ingredients:

• An increase in infrastructure spending
• Focusing new spending on core areas of health, education & law & order
• Plowing savings back into new frontline spending, so one is not cutting overall spending in a recession.
• Reducing future spending and future tax cuts to bring the deficit into surplus and cap debt.
• Suspending Super Fund contributions so you don’t borrow $20 billion to “save”

It is pretty orthodox, and as I said probably almost wrote itself. It isn’t a budget for closing the gap with Australia, or seriously rejigging the economy. It’s the budget you have to have first, before you can get to grips with some of the other stuff. I can over-state how much of a disaster it would be I financing costs on debt were allowed to grow to greater than current Vote Health.

The politics around the Budget will be interesting. You could almost see the Greens abstain on it – after all it cancels tax cuts and gives a huge amount to home insulations etc. Labour will not be able to propose a constructive alternative (they will of course scare monger). The consensus amongst most media in the lockup seems to be that there wasn’t much else the Government could have done.

It also sets up an interesting election in 2011. The books will still be significantly in deficit, and National will not be offering tax cuts in all probability. So what will Labour promise to do differently? If they promise extra spending, then they can be branded as irresponsible and increasing debt. If they promise tax increases, then that won’t be very popular either.

Labour’s entire 2008 election campaign was based on how you can’t trust John Key, that he is not a centrist – but secretly a hard line right winger (like me who wants to sell everything and slash spending and taxes. Their worst nightmare continues to play out – that John Key is exactly what he campaigned on – a centrist.

I’m in the Budget lockup from 10 am to 2 pm, so hope to have some initial posts by 3 pm (there is a rolling embargo which means you can only blog certain stuff as Bill gets to it in his speech).

Until I post further, feel free to use this thread for budget related discussions.

Any posts which appear between 10 am and 2 pm are time delayed from this morning.

Brian Fallow in the Herald looks at why we now have a debt problem:

Over the past five years, government spending has increased by 50 per cent – twice as fast as the economy or tax revenues have grown.

Even in the same budget as which Dr Cullen finally gave tax cuts, he still increased spending by $4.5 billion. He didn’t even leave enough money for his Super Fund contributions – and that was before the flobal recession.

But now tax revenues are falling as the recession lays waste to the tax base. Treasury secretary John Whitehead says it will be some time in 2011 before the level of economic activity is back to where it was in 2007.

So three or more years of no extra income, yet the continual spending increases give us a huge deficit and debt problem.

This would see gross government debt double by 2013, relative to the size of the economy, and in the absence of a policy response climb to over 75 per cent of GDP by 2023. That is where it peaked in 1987; only by 2023 there will be the added pressure of baby-boomer pressure on health and superannuation costs.

This is what the situation would be under Labour. Labour have condemned basically every saving National has made, and just demanded more and more spending.

Whitehead in a speech on May 15 spelled out what that level of debt would mean. It would be $49,000 for every man woman and child in the country: “A family of four would basically have another mortgage of close to $200,000″.

$200,000 debt for a four person family. Not much of a future.

“But as we see it the most effective way the Government can begin to get on top of expenses is by reducing the spending allowances for future Budgets, currently set at $1.75 billion for the 2009 Budget and increasing by 2 per cent a year in each of the next three Budgets.”

Over four years that provision is a cumulative $18 billion in new spending. “We expect the Government to halve those spending allowances,” Purdue said.

Reducing the provision is sensible. In the late 1990s it was only $600 million a year. At $600 million a year then over four years it is only $6 billion as opposed to $18 billion.

The Herald reports:

Next week’s Budget is one of the most important in over a quarter of a century, says Treasury Secretary John Whitehead.

Mr Whitehead, who has been directly or indirectly associated with Budgets stretching back to the last years of the Muldoon Administration, said next Thursday’s was the most critical since Labour’s Budget to confront the economic and currency crisis in 1984.

Now Whitehead is no ideological Rogernome. In fact Whitehead is a former Deputy Director of the Labour Research Unit (when Muldoon was PM), so I think the left should listen to him when he stresses how important the budget is.

During a round of meetings with business groups, banks and media in Auckland yesterday, Mr Whitehead emphasised the importance of the Budget’s role in retaining the country’s credit rating to keep Government and business borrowing costs down.

The Standard & Poor’s rating agency already has New Zealand on a negative outlook and has said the Budget will be critical in re-rating the country.

It is worth remembering how precarious our position is. Not only will a credit downgrade cost the Government $600 million a year, it will increase credit costs to every business.

And everytime you see Labour complaining that National is saving money through a more efficient public service, remember that without these savings the Government would be facing a permament structural deficit of $10 billion a year.

Have you heard a single proposal from Labour (or the Greens) on how to cut (annual) expenditure to stop the descent into permament deficit and debt?

Labour have produced out of their Leader’s Office budget, a pamphlet promoting the 2008 budget. The NZ Herald reports that it is almost certainly an election expense and will come out of the $2.4 million spending cap:

Wellington electoral law specialist Graeme Edgeler said last night the leaflet met the definition of election advertisement under the Electoral Finance Act.

“It doesn’t say vote Labour, but that is the clear implication.”

It had party colours, the Labour logo, and the party’s tax-cut promises this year and in the future.

He did not believe it could be considered under the exception given to an MP producing material in their capacity as MP.

“This is a Labour Party promotional leaflet.”

It was “almost certainly” an election advertisement and as such should be declared in the party’s expenses.

Any postage costs in sending it out, should also be included!

It may also count as a donation:

Mr Edgeler also said that under the new law, the cost of the leaflet might have to be declared as an election donation by the Parliamentary Service to the Labour Party.

“If I gave the Labour Party $30,000 worth of leaflets it would be a donation – just as if they printed off $30,000 worth and sent me the bill and I paid it, that would be a donation.

“I really don’t see the difference between them sending a bill to me, or getting the leaflets from me, and them sending the bill to the Parliamentary Service or getting the leaflets from the Parliamentary Service.”

It will be very interesting to have revealed the total amount of taxpayer funding spent on election advertising.

UPDATE: It appears the Government was unable to find a happy New Zealand family for their publicity campaign, so they have used an American family!

Well done to Skinny for his detective work. Someone has found another photo of the family which more fairly reflects their situation:

This is very very funny.

Bernard Hickey is strongly disapproving of the budget:

Talk about going out on a low note. …

The result of pulling all the levers in the wrong direction (tax cuts and spending increases) was the destruction of the budget surplus that Dr Cullen had spent the last eight years building up and protecting. Blown in one last desperate act. Dr Cullen and Ms Clark have now said they will fund the cash deficit after investments by running down the Reserve Bank’s reserves and issuing more bonds.

It is the equivalent of throwing it all on the roulette table.

Whatever happened to their mantra that they wouldn’t pay for tax cuts by running up debts? Their (quite powerful) argument that it wasn’t right for National to pay for tax cuts with debt is now dead as the proverbial. Their rebuttal that the debt is only paying for infrastructure is, strictly speaking, true, but debt wouldn’t have to be raised without the tax cuts. There’s no getting away from this. They are raiding the Reserve Bank’s cookie jar and borrowing from foreigners for an irresponsible spending and tax cutting budget.

The Labour line of not borrowing for tax cuts is dead and discredited.  Now as I have said, I actually do not have a problem with borrowing for capital investment so long as the operating surplus (OBEGAL) remains positive and large enough to cover the Cullen Fund and a buffer on top of that. But OBEGAL will not be high enough to even cover the Cullen Fund until 2016.

Also, their argument that only National will fund big tax cuts with big cuts in government spending is also dead. Buried in the budget is a line about unspecified spending cuts totalling NZ$1 billion over the next four years that Labour will have to find to help pay for the tax cuts. Dr Cullen flat out refused to answer my question in the lockup about what type of spending cuts they would be. The only answer he could have given is that he hasn’t dreamt them up yet. We can be sure he won’t enlighten us before the election.

Indeed, Labour is wailing in the House about how John Key will cut spending, and have cut $1.5 billion over three years themselves. They really have no shame.

Any of the last vestiges of Dr Cullen’s hard-won reputation for fiscal conservatism went down into that kitchen sink of pre-election goodies. This is a tragedy for a finance minister who could rightly say until today that he had been one of the most level-headed and careful of economic guardians in our history.

It really has been from Jekyll to Hyde.

Financial markets are greedy, reactive and selfish at the best of times. But they often cut to the nub of an announcement in a flash. Within minutes yesterday, they judged this budget as inflationary enough to make the Reserve Bank’s inflation-fighting task more difficult and therefore likely to delay interest rate cuts.

The New Zealand dollar surged over 78.5 US cents and wholesale interest rates rose sharply.

If Bollard cuts rates now, he’ll deserve to be sacked for repeatedly missing his target.

Here’s Helen Kevans from JP Morgan:

The significant loosening of fiscal policy via larger than expected income tax relief delivered in Budget 2008, and the significant increase in government spending, will leave little scope for the RBNZ to cut interest rates in coming months. Futures market pricing implies rate cuts could come as early as next month, but this now looks much less likely.

And here’s Khoon Goh, ANZ National’s senior economist and interest rate strategist:

This is the largest fiscal stimulus since the 1997 tax cuts. Even with the deteriorating economic outlook, such a sizable package will have the RBNZ on notice. Not enough for them to hike, but certainly enough for them to be wary of the potential reflationary role fiscal policy could play.

Any smidgen of satisfaction or hope from Cullen and Clark that this budget might be able to rise above our stagflationary morass was wiped out in an instant.

This rise in the currency and interest rates will hurt us all and almost immediately. This is another kick in the guts for exporters. Businesses relying on variable interest rates are likely to pay almost immediately, either in the form of higher interest rates or in interest rate cuts that now won’t eventuate.

And at the end of the day it is about growing the national income, not just how to spend it.

It all seems so pointless now. This Budget aimed to put between $12 and $28 a week of tax cuts into wage earners’ pay packets from October 1, a few weeks before the election. However, any taxpayer with a $200,000 mortgage who misses out on a 0.5% cut in interest rates will miss out on $19 a week in lower interest payments. About $40 billion of fixed rate mortgages will roll over between now and the election. The interest rates on those will be around 9.5%, up from around the 8% they fixed at two years ago. That’s nearly $60 a week in extra interest costs. Let’s not forget the $60 to $70 extra in food and petrol costs too for most families.

They giveth with one hand and taketh with the other.

Dr Cullen and Miss Clark have failed the central challenge of our times. We must throw the kitchen sink at beating inflation and turning around a slide into stagflation. Leaders take tough decisions in tough times and we respect them for it. The tax cuts should have been postponed and government spending should have been restrained. Any new spending should have been focused on infrastructure and productivity increases.

This Budget was collectively the most expedient, shortsighted and venal decision in nine years of this Labour government.

It will be their last.

No-one can accuse Bernard of mincing his words. But he is right to be concerned. This budget may give us stagflation for several years if we are not careful – high inflation, high interest rates and low economic growth.

Some commentators have speculated that this could be deliberate. That Labour know they will probably lose in 2008, but that they can reduce National to a one term Government if they leave them a stagflating economy, as people always blame the Government in power. Bill English will have his work cut out repairing the damage.

The Deloitte team who were behind me in the lockup gave me a copy for the blog of their Deloitte Tax Cut Calculator (now on their website) which is an excel spreadsheet.

It not only shows you how much your tax will be in Oct 2008, April 2010 and April 2011 but also what the same tax would be in Australia.

They have also calculated how much you need to earn to be paying less tax in NZ than Australia. It used to be $1,571,922 but now life gets better in NZ at merely $1,284,992.

The Visible Hand in Economics has also links to three other calculators

1. Infometrics which gives you the annual and weekly reduction in tax and percentages
2. Labour, which includes WFF for the breeders
3. NZIER which has an Excel spreadsheet

Worth remembering that the annual figure for Oct 2008 will be half that, as it only applies for half the year.

NZIER helpfully also shows you what your tax would have been in 2000 in both NZ and Australia. So if you are on $100,000 you would have been paying the same tax in 2000 ($22,057 in NZ and $22,446 in Australia). In 2010 it will be $30,588 and $26,569 respectively. This assumes 3% wage growth.

Matt Nolan at TVHE also looks at the impact of both tax cuts and huge spending increases on inflation. He thinks it is possible inflation may hit 5%, which would suggest interest rates staying high for a while yet.

First the Herald:

A tax cut law is expected to pass through Parliament today under urgency – with the support of National. …

Dr Cullen delivered a fiscally tight Budget with a cash deficit of $3.5 billion and forecasts of similar amounts over the next four years, making it difficult for National to say “me too” to Labour’s policies.

It is likely to be squeezed into identifying existing policies it would cut or borrow more.

Mr Key said National would “reprioritise”, and acknowledged it would need to spell out in an alternative Budget before the election which of Labour’s policies it would scrap.

“It’s not a question of whether spending is ‘nice’. Most Government expenditure is ‘nice’,” Mr Key said.

“There are certain times when it becomes luxury, and we think that at a time when New Zealanders are struggling, the number one priority is to put money in the pockets of hard-working New Zealanders and we are prepared to prioritise that over other initiatives.”

Mr Key said National would probably wait until the start of the election campaign before unveiling its own economic package.

Simon Collins looks at the numbers:

In dollar terms, the tax cuts get bigger as your income rises – from $22 a week at $20,000 a year to $32 a week at around $50,000 and a maximum cut of $55 a week at $80,000 by 2011.

But in percentage terms, the biggest cuts are at the bottom – 5.7 per cent at $20,000, 3.3 per cent at $50,000 and 3.6 per cent at $80,000.

I agree it is the percentage changes which are most important. Tax cuts will always deliver more to those who pay more tax in absolute terms. The irony is that the left have spent 15 years attacking that concept and arguing that tax cuts favour the rich as they always get more tax back from them.

John Armstrong sees the budget as giving Labour breathing space:

The last waltz on the Titanic? Michael Cullen’s ninth, probably final and most political Budget yet will not on its own save Labour’s neck.

But then it was not expected to do so. Labour has simply arrived at the tax cut party too late – and probably with too little. But the Budget will have done its job if it keeps Labour in contention until the start of the election campaign, when the real business begins.

By his own admission, Cullen has reached the limits of his “comfort zone”. He has risked sacrificing his longstanding reputation for fiscal rectitude in order to get a short-term political payoff. The net result is someone on the average wage of $45,000 gets an extra $16 a week from October. Hardly a sum to provoke mass rejoicing in the streets.

Brian Fallow notes the empty piggy bank:

Michael Cullen has emptied the piggy-bank in a bid to mitigate the severity of the economic slowdown.

After running Budget surpluses in the range of 3 to 6 per cent of gross domestic product during the good times of the past six years, he has now slashed them to well under 1 per cent over the next four years.

He has in fact cut them so much he needs to borrow money to put into his Cullen Fund. Anyone else doing that would be howled down. It is indeed a “poison pill” budget like in 1990 designed to force the next Government to run a deficit or cut spending.

Vernon Small labels the budget brave and possibly reckless:

That is one brave - as in almost reckless - Budget. …

The plan is to leave precious little room for National to move unless it wants to admit to specific service cuts or borrow-up large. I find it hard to believe that, back in Government, Labour would be able to stick to that spending track, given $750 million a year is already earmarked for health and there are other big wage bills in the public sector.

Even if Labour wins, this will be Cullen’s last budget. His successor will find this an absolute hospital pass, with basically no major new initiatives possible for half a decade.

The Press labels it not a winner:

The cuts are the first that Cullen has made as Minister of Finance despite the fact that the country has run large Budget surpluses for more than four years. They do not begin to come into effect until October this year. Many critics look enviously across the Tasman and see an economy similar to New Zealand’s in many respects, where income-earners have just had a Budget that has given them tax cuts for the fifth year in succession. Many will say the cuts now are too little and too late.

This Budget is not an obvious election winner. But now that Cullen has finally laid his tax-relief cards on the table, the onus is sharply on the National leader, John Key, to spell out what he will do if he is elected to office. Now, or very soon, Key must state clearly not only the size of any tax cuts he will make but also, and most crucially, how they will be paid for. Empty points-scoring in this debate is no longer enough.

As with previous elections, National has said they will present a fully costed budget making clear what spending they will or will not commit to.

The Dom Post is similar:

Finance Minister Michael Cullen has screwed up his courage, abandoned the prejudices of a political lifetime and pushed all his chips into the middle, The Dominion Post writes.

The tax cuts unveiled in yesterday’s Budget represent a desperate last-ditch bid by Labour to recapture voters’ attention. They go against almost everything Dr Cullen has preached in his eight-and-a-half years in charge of the country’s finances.

To fund the $10.6 billion cost of the threshold changes over the next four years he is dramatically reducing the size of the buffer he has previously maintained between government expenses and revenue, increasing debt and reducing the provision for new spending in future Budgets by $250 million a year to $1.75 billion.

Yep, all stuff which Dr Cullen has attacked in the past.

And the NZ Herald:

The revenue he has harvested from rising incomes has been a major contributor to the surpluses that will drop now to a level designed to leave little to spare for the party in power next year. The cash balance will be in deficit after the required $2 billion contribution to the pension fund.

Again Dr Cullen will be borrowing money to invest it in the Cullen Fund. And this will remain the case until 2016!

Dr Cullen can point to nine consecutive years of growth, a record no other Finance Minister has enjoyed in his lifetime, but he would be hard pressed to explain how excess taxation contributed to it.

The money rightly belonged to the overtaxed all along. If they are less than grateful for relief that will come just weeks before the likely election date, they can be forgiven. Dr Cullen says Budgets can lose elections but not win them. The best this one can do for his Government is no further harm.

Fran O’Sullivan looks at borrowing:

Gross debt will expand in nominal terms. But as a percentage of GDP it will still trend around 20 per cent, if GDP grows at the 1.5 per cent rate Treasury has forecast for 2008-09. This could be a very big “if” indeed if the international economic climate gets worse.

Clearly if the boot had been on the other foot, Cullen would have been railing against the imprudent, irresponsible behaviour of a National government intent on bribing voters with their own money to win an election.

Exactly

Whichever party forms a government after this year’s election, it will still be faced with the likely need to reprioritise spending or take on more debt to underpin the tax-cutting programme – at least in the short term, until the dynamic effects of personal tax cuts kick into gear and push the cycle up again.

There will be spending cuts regardless of who is in office. The only difference is Labour calls them “reprioritisation”.

Dr Cullen’s ninth and probably final budget is a cunning political device but economically risky and most of all incredibly hypocritical.

The entire budget is designed for one and one purpose only – to try and stuff over National and make it impossible for them to offer larger tax cuts without spending cuts.

Imagine the outcry from Dr Cullen and the left if Bill English as Minister of Finance did the following:

1. Run a cash deficit of $13.7 billion over four years to fund $10.6 billion of tax cuts
2. Ran the OBEGAL operating surplus so low that it will not be large enough to fund the Cullen Fund contributions until 2016
3. Reduced the contingency expenditure provision by $2.5 billion over four years (or $250 million a year)

You would have the left shouting from the treetops that Bill English is borrowing to fund tax cuts, that pensioners should start hoarding catfood because National is planning to starve the Cullen Fund of money, and that reducing contingency expenditure is slashing spending on health and education.

I got to ask Dr Cullen a question on how he would answer the challenge that he is borrowing to fund tax cuts, and he answered that he isn’t, that he is borrowing to fund capital investment.

The irony is that I didn’t agree with the premise of my question – I was in fact quoting what Labour have said for the past few years about borrowing and tax cuts, and the further irony is that Dr Cullen’s response was the argument I have made in the past that borrowing is okay if for capital, not operating expenditure.

As I said above, this budget exists for one reason only – to try and stuff over National. The logical inconsistency of saying we can’t afford tax cuts when the surplus is close to $10 billion, and then delivering tax cuts when the surplus has basically shrunk to zero is staggering.

OBEGAL, the operating balance or surplus after one off gains and losses is forecast to be just $1.0b next year, reducing to $200 million in 2011/12. That is well below a prudent level – I have generally maintained the OBEGAL should be enough to meet the Cullen Fund contribution around $2 billion) and around $1 billion on top of that. So this level of surplus is around $2 billion to $3 billion below that. Cullen has gone from hoarding all the money to spending it all.

Core crown expenditure is forecast to expand from $54 billion last year to a whopping $70 billion in 2012.

Core crown revenue was $58.4 billion last year. The tax cuts sees it stay at around $62 billion this year and next year but then increasing to $69 billion in 2012. So Cullen has core corwn expenditure greater than core crown income for the first time since the last Labour Government. This is a potential repeat of 1990 in terms of leaving the next Government with a deficit.

Net core Crown debt is forecast to go from $1.8 billion to $13.2 billion.

Dr Cullen could hardly contain his glee at having spent everything. Basically the fiscal margin for the next five to six years is close to zero. A further downturn and you have have significant problems. He has happily thrown away his previous fiscal discipline.

So this will make it tougher for National. they certainly will be able to deliver tax cuts larger than these ones, but not massively larger unless they get more rigorous with saying no to various spending proposals. There are not a lot of easy options thanks to Dr Cullen’s empyting or the larder. If by some chance Labour do get re-elected Dr Cullen’s successor will be equally as grumpy with him as Bill English might be – don’t expect any Government can deliver any significant new spending initiatives in the next few years.

I don’t think it is entirely a bad thing that National may have to say no to some more of Labour’s spending. Yes there is a political risk in doing so, but it is at times of economic hardship that people expect the Government to manage its spending more carefully – just as households do. And National certainly has some capital in terms of a lead in the polls that it can use up.

The level of tax cuts is in line with what I expected. If they were part of a continuing series of tax cuts over the last few years, they would probably meet expectations. But by having given nothing back (to the 80% who don’t have Working For Families) for eight years, people will find it really doesn’t even compensate for fiscal drag.

Dr Cullen has spent so much everywhere else that all he has been able to do is drop the 15% tax rate to 12.5%, and move the thresholds up by a few thousand a year.

From 1 Oct 2008 it will be 12.5% on the 1st $14,000 of income, then 21% to $40,000, 33% to $70,000 and 39% over that.

On 1 April 2010 the thresholds move to $17,500, $40,000 and $75,000 respectively.

And on 1 April 2011 they move to $20,000, $42,500 and $80,000.

The table below shows what we currently pay in tax, and what under this plan it will be from now until 2011. The percentage shown is the average tax rate on that income.

Next I look at what the extra income will be for people

So someone working part-time on $10,000 is $280 a year better off or $5.40 a week. Go to near the average wage of $40,000 and they are $860 a year better off or $16.50 a week. By 2011 that will be $1,370 better off or $26.27 a week.

But what has been bracket creep since 2000? Someone on the average wage in 2000 earnt $33,968 and paid tax of $6,623 which is an average tax rate of 19.5%. In 2007 their earnings were $44,123 with tax of $9,430 which is an average tax rate of 21.4%.

Now assume by 2011/12 the average wage will be $50,000 (I suspect it will be more than that). Even under these tax cuts the tax will be $9,700 which is 19.4%. In other words for someone on the average wage, this merely restores you to where you would be without bracket creep.

Now let us look at how we will compare to Australia

So even after these tax cuts are implemented, someone in Australia on $50,000 will pay $2,800 less tax which is $54 a week less. You would pay $6,900 tax in Australia or $9,700 tax in New Zealand. Someone on just above the minimum wage at $30,000 will still pay twice as much tax in NZ – $3,100 compared to $1,500.

So it’s not a bad start. It is reasaonably well balanced, but it is still quite modest in comparison to Australia. Also the proportion of tax paid in the year to March 2009 by those rich pricks earning over $60,000 increases to 55%. Yes the top 15% pay 55% of the tax, and the bottom 15% pay 1%. Now of course the top earners will always pay more, but with wages higher and tax less in Australia, the incentives to move remain strong.

The real challenge is to deliver tax cuts which not only give people some more of their money back, but also are designed to boost economic growth. It is by boosting economic growth that one can really close the gap.

Like last year, I am in the budget lockup. At 2 pm I will be able to start posting again, but only on issues Dr Cullen has covered in his speech as he reads it.

Roger Nome, Sonic and Ghost Who Walks are appointed Acting Moderators until then.

(more…)

The Dom Post has some advice for Dr Cullen:

The grim reality facing Dr Cullen, however, is that unless today’s Budget contains a circuit-breaker he and his ministerial colleagues can start packing up their ministerial offices …

Prime Minister Helen Clark says the Fairfax poll, showing Labour 27 points behind National, is “totally out of line”. She is wrong. It is a reputable, scientific poll that continues a trend showing voters have become increasingly disenchanted with a Government that preaches to them about what they can eat and how they should discipline their children, but does not trust them to spend their own money.

So very very true. Families are told the Government does not trust them to feed their kids okay, does not trust them to be good parents and does not trust them to spend their own money.

Three years ago Dr Cullen reluctantly agreed to index tax thresholds to the rate of inflation to stop bracket creep shifting more and more middle-income earners into the top tax bracket, but he cancelled what became derisively known as the “chewing gum” tax cuts when the public showed insufficient gratitude.

Today he will again announce cuts, almost certainly larger than those previously promised, but with National leader John Key having cleverly raised the bar by suggesting a National government would cut taxes by more than $50 a week, the smaller cuts that have been signalled will not meet public expectations.

I commented to a journalist yesterday that John’s casual reference to $50 a week was either calculated genius or thinking aloud, but which ever one it was it has been devastating for Labour in terms of expectations.

Dr Cullen can be expected to point out that larger cuts would increase inflation, pushing up interest rates. But that is not an insurmountable problem. Across the Tasman the new Labor government of Kevin Rudd has honoured its pledge to reduce personal income taxes by A$47 billion over the next four years by curbing the future growth of government spending.

Absolutely. And tax cuts have less of an impact on inflation then extra government spending.

That is an avenue that has long been open to the Clark Government. Since taking office in 1999 government spending has doubled from $36 billion to $72 billion and, according to Mr Key, the number of bureaucrats has increased 37 per cent from just over 26,000 to 36,000.

Some of the increases are due to inflation and some to increases in the population, but Dr Cullen and his colleagues have not applied the same discipline to their spending as businesses and families are forced to do every day to survive.

There was some discipline early on but in the last few years the spending increases has been uncontrolled and more and more on low quality projects. In some Departments bureaucrats have even been told they are to bid for more than they actually want, and then to think up things to spend it on. Seriously.

It is past time for the government to take a more rigorous approach to its own spending. Doing so would increase the money available for tax cuts and reduce their inflationary impact. If Dr Cullen does not do so today, voters can take comfort from the knowledge that National will after the election.

And it adds up pretty quickly. $230 million has been spent on the Electricity Commission. Off memory $150 million on TEC. Close to a billion dollars wasted on low quality tertiary courses. Ministries are now bulging with communication officers, the SSC has been expanding out of sight etc etc.

Claire Trevett previews the budget issues:

Yet far from being the party’s salvation, this Budget – with expectations riding almost impossibly high – could well be Dr Cullen’s Waterloo. Dr Cullen has drunk from the cup of parsimony far too many times and Victoria University lecturer Jon Johansson said it had led to “an intractable negative perception” of him.

A political science lecturer, Mr Johansson doesn’t think it will matter which figure Dr Cullen pulls out of his hat tomorrow. “When you talk to people about Cullen there is real intensity and negativity. I think he is Labour’s biggest liability.”

I think this is right. In some ways it is unfair as Cullen is an incredibly competent Minister, he has generally resisted doing anything really harmful (like tinkering with the Reserve Bank Act, GST, Fiscal Responsibility Act), has presided over or benefited from eight years of strong economic growth and introduced some policies which will be long lasting – the Cullen Fund and KiwiSaver.

But his intransigence on personal tax rates has negated all that to a large segment of the public. If he had moved earlier on tax, then he might retire with bipartisan appreciation as having been one of NZ’s best Finance Ministers.

However you can’t run absolutely enormous surpluses year after year and refuse to lower tax rates, especially as inflation and bracket creep push people into paying more tax every year. Even worse you can’t announce tax cuts and then cancel them – even if they were small insignificant ones.

The problem for Dr Cullen now is that tomorrow’s tax cuts look insincere and grudging. I doubt a single person in NZ really thinks Dr Cullen wants to cut taxes as opposed to being forced to cut taxes.

Dr Claire Robinson, a political marketing specialist at Massey University, said Labour did not deliver what voters wanted in Budget ’07, and many had gone to National.

“There’s not much Labour can do in this Budget to lift itself from the doldrums. It will take a miracle to shift those voters back to Labour, and Michael Cullen doesn’t believe it is his role to deliver miracles.”

While Dr Cullen has been downplaying the size of his proposed three-year programme, National this week has been bandying about figures of $50 a week in a bid to ramp up the pressure on Cullen.

Mr Johansson and Dr Robinson said the public will be deaf to anything Labour has to offer or to arguments that National would be fiscally irresponsible to offer more.

I am confident National’s tax cuts will not be at all fiscally irresponsible. Bill English will not be delivering deficits in Government.

The bigger challenge for National will be the impact on inflation. However this can be over-stated, and one way to deal with this is to have a smaller reduction every year than one big reduction in one year. Also many people do understand that higher interest rates are temporary, while a reduction in tax is permament.C

Oh I so envy Australia for its luck in having a more moderate less extreme and idelogical Labor Party. Let us look at what Wayne Swan has delivered. Australia’s population is around five times New Zealand so generally divide by five to get an idea of what it would be for a country our size:

• Tax Cuts of $47 billion
• No tax on the 1st $14,000 of income – rising to the 1st $20,000
• A surplus of  $22 billion which is the largest for a decade but get this only around half what Cullen’s level of surplus has been per capita.
• A move to means testing for welfare rather than universal entitlement for the “baby bonus”
• $33 billion (equal to around $6 billion in a NZ sized country) of savings from cutting wasteful or low quality spending
• $4.7 billion on a national broadband network

Lowering taxes, cutting wasteful spending and targeting welfare at those most in need instead of the rich is not some mad right wing agenda. It is normal day to day prudent management by any Government right or left.