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.