ECONOMICS Tinkering with Tax

Labour would have been smarting from the results of poll published few hours earlier, as this column was being prepared for the printer. The National Business Review-Phillips Fox poll put National ahead of Labour with enough support to form government with New Zealand First. More important, it showed neither National nor Labour would be able to form government without New Zealand First.
A week or so earlier, Herald-DigiPoll survey taken soon after Budget Day showed dissatisfaction over the tax cuts issue and National closing the gap. The KiwiSaver workplace savings scheme, the Budget measure which Labour had hoped would wow the electorate, obviously hadn’t done the trick politically. Voters were responding adversely to the Clark Government’s tinkering with the tax thresholds and tax rates were shaping as major election issue.
A decline of business confidence in May to 17-year-low, according to the monthly National Bank survey measure, hinted at disaffection with the Budget, too.
Hinted? National finance spokesman John Key was adamant about it. “Businesses have identified Labour’s wasted opportunity in the Budget,” he said. “They’re looking down the track at the numbers and they have realised this is as good as it gets under Labour.”
More particularly, Key linked the rise in pessimism to the failure of the Government to cut taxes. “Even Labour Party president Mike Williams was expecting better from Michael Cullen,” he gloated. “The miserly tax tinkering, due to take effect in three years, is an insult to workers. Before then, all of us will have been stung by Labour’s unnecessary carbon tax.”
The tax cuts on National’s (and other party) agendas certainly are much easier to sell to the electorate than fiscal rigour. Especially when people generally are aware of the string of budget surpluses that has distinguished Finance Minister Michael Cullen’s fiscal management.
Offer voters more money in their weekly pay packet or business cash flows, or the status quo, and what will they do?
The converse to tax cuts is reduced government spending. But it’s hard row to hoe, trying to warn voters about the implications of National’s plans – as divulged by Key to the Herald on Sunday – to lop government spending within three years from 32 percent of GDP to 27 percent.
Dr Cullen responded by explaining what this would mean in terms of reduced services (assuming the reduction is applied evenly across all government spending): 4065 fewer primary school teachers; 3220 fewer secondary teachers; 1260 fewer sworn police; 185 fewer frontline social workers; 3445 fewer nurses; 910 fewer hospital doctors; $70.62 week cut to New Zealand Super for married couple.
In the past, opinion polls have shown remarkable willingness of people to preserve public services in preference to tax cuts. Whether that sentiment persists is open to question as the clamour for tax cuts mounts and is given support by economists, such as those at Westpac who published paper early in June.
The paper dealt with the magnitude of government surpluses in recent years and the tax issue, analysed recent trends in personal income taxation, and asked: “is the growing call for tax cuts justified?”
According to Westpac’s estimates, if there is no adjustment of the tax thresholds before 1 April 2008 (there won’t be under the Clark Government’s Budget announcement), $1.4 billion of additional tax will be paid over the next three years. Moreover, if the tax-to-income ratio had been held constant at its 2000 value, then the household sector would have paid $8.7 billion less in income tax over the eight years to 2008.
Westpac concluded there is considerable element of tax relief to be had before anyone even starts talking about tax cuts.
But another element of fiscal policy differences tended to be overlooked: Labour is hell-bent on wiping out the public debt while National would borrow again, for appropriate capital developments.
Not so long ago, the country indeed had public debt problem and debt repayments gobbled up big lumps of the government’s annual revenue. In December 1987 the public debt had climbed to around 75 percent of the country’s gross domestic product and the Lange government announced slimming regime, in part through programme of asset sales. NZ Steel, Petrocorp, Post Office Savings Bank, Air New Zealand, Rural Bank, State Insurance and Telecom were smartly sold off.
Gross sovereign-issued debt since then has been whittled down to around 23 percent of GDP, one of the smallest among developed countries.
From an economic perspective, National is right. Government borrowing should not be shunned. The issue is what the borrowing will be used for. Chances are we won’t find out until the borrowing is undertaken and the purpose declared.

Bob Edlin is regular contributor to Management.

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