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Sludge Report #167 - A Very Political Budget

A Very Political (And Parsimonious) Budget

By C.D.Sludge

The "good" Dr Michael Cullen, not unlike Old Mother Hubbard

Asked if this was his best, worst or perhaps just a middling sort of budget in today's lock-up press conference Finance Minister Dr Michael Cullen responded:

“Like my children I love them all equally, but not always simultaneously.”

Looking closely at this, Dr Cullen’s fifth, budget one can easily imagine what Dr Cullen’s response might be if asked by one of these children whether he would be willing to help them buy a car.

“Perhaps in three years time, if you start saving your pocket money today. ”

Like old mother hubbard Dr Cullen is always watching the state of his cupboards, and this year he is anticipating future shortages.

Like each of his four previous efforts, Dr Cullen’s Budget 2005 is a mixture of fiscal conservatism, thriftyness and guile tied up with a bunch of promises of future benefits if we can but see the wood for the trees.

And this is above all else a political budget, just not as you know it.

Dr Cullen must be the first Finance Minister in the OECD to announce a tiny tax cut that takes place in three years time, and make it a feature of his election year offer to the electorate.

Rather than offer the public a bribe to vote his Government back into office, Dr Cullen has instead chosen to set a trap for the opposition.

He is at pains to point out that according to Treasury's fiscal forecasts we are nearing the end of the golden weather.

Notably he does this partly by sleight of hand - apparently the relevant statistic for us to watch is no longer the surplus, nor for that matter even the OBERAC (roughly the surplus without valuation changes). What matters now is the Government's cash position.

And in cash terms this is the last year that Cullen anticipates having any loose change in his larder.

Politically speaking Dr Cullen clearly intends to stomp on any party who proposes income tax cuts in the coming election. They will be accused of endangering health and education spending, this is an old line he has used a lot lately, and one which he used again today.

Meanwhile in something of a deft backhand play, Dr Cullen has in fact announced substantial targeted tax cuts - $1.8 billion worth - for business taxpayers.

In the world of real-politik this will be doubtless perceived for what it is, a nod confirming that this government is not yet a government of the people (socialist) instead remaining as business friendly as it has been since it first started holding summits with the business community shortly after entering office in 1999.

In international terms Dr Cullen's approach is fairly novel.

Dr Cullen's Trans-Tasman counterpart Peter Costello presented his most recent election year budget full to the brim with goodies for the voting public. Tax cuts, grants for having babies and grants for buying houses. And as we know it worked a treat for John Howard.

While Dr Cullen’s latest budget does include a first home purchase grant, unlike those in Oz, Cullen’s version of a first home grant is smaller and – significantly - tied to five years of virtuous retirement saving.

Looking at the headline numbers posted today there are some small shades of the UK’s Gordon Brown’s 2002 budget in terms of massive provisioning for increased health expenditure, seemingly at the expense of all else. However this appearance is somewhat superficial as the other major elements in this budget are the aforementioned business tax cuts, and boosts in defence personnel expenditure.

According to Dr Cullen, health's $1 billion in boosted annual expenditure comes within a total new spending package this year of $2.7 billion.

More oddly - in terms of international comparisons - there a spectre of George Bush’s Social Security Privatisation agenda to be discerned in the KiwiSaver initiative which, if anything, makes up the sharp end in this budget.

Like Bush, Cullen is keen to encourage people to put their savings at the mercy of international capital markets. Savings placed into KiwiSaver, like savings into privatised Social Security, will not be government guaranteed. If you are in your 20s or 30s and there is a 1929 like crash sometime in the next 30 or 40 years that will be your tough luck.

However unlike Bush’s plan Cullen’s is, a) voluntary b) rather flexible and c) additional not instead of Government Guaranteed super.

Where Dr Cullen’s plan starts to get cute is when it comes to taking account of the lifestyle choices exemplified in a new mythical middle to low income NZ couple Peter and Aroha.

Whether intentional or not the biblical references implicit in the naming of this couple - one named for the first Bishop of Rome and the other named Love - is undeniable. One would be guessing but perhaps the names are some indication of the esteem with which Dr Cullen regards his new Mr & Mrs Kiwi Battler.

In a scenario which will doubtless be played out on TV this evening Peter and Aroha decide to “opt-in” and become some of Cullen’s first KiwiSavers earning themselves a $1000 sign-on bonus each. As their life voyage pans out Cullen’s KiwiSaver scheme is flexible enough to cope with their lives’ ups and downs.

Aroha decides to take a break from work and have some kids. Her KiwiSaver account survives the blow.

Both Peter and Aroha save diligently for five years and so get the maximum $10,000 first home purchase grant. Then after buying their modest home (expensive homes will not qualify) Peter is able to redirect his savings to pay off the mortgage rather than have his funds at the mercy of international capital. His KiwiSaver balance finally starts growing after the mortgage has been paid off.

In the end, after faithfully following them through the turns and byways of life, Peter and Aroha arrive in the twilight of their years (presumably with Michael Cullen by now pushing up daisies) with $120,000 in their KiwiSaver scheme, Government Super and a mortgage free home.


But will the public buy it.

Cullen acknowledges that his scheme will doubtless be portrayed by some as being bossy.

But he doesn't seem to care.

And if history is any guide other novel approaches taken by the good Dr Cullen - such as the super (Cullen) fund – are rapidly becoming part of New Zealand's economic firmament.

Anti(c)opyright Sludge 2005

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