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Cullen's Last Budget Could Be Key's First

Cullen's Last Budget Could Be Key's First


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Finance Minister Dr Michael Cullen delivering his ninth budget

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Michael Cullen’s last Budget has delivered something very like John Key’s first, argues Pattrick Smellie

First things first: Michael Cullen deliberately undersold his last Budget in the run-up to announcement.

It is more generous in the tax relief that it offers than he’d led us to believe for taxpayers at every level.

The change to the lowest tax rate from 15% to 12.5% - even though it’s phased – is a meaningful boost to the after-tax income of every New Zealander.

For the mythical Jack, Meg and their kids on a household income of $65,000 a year, this Budget delivers $43 a week in the wallet from October this year - damn close to the “north of $50” a week tax cut nominated by National Party leader John Key as achievable – when Working for Families entitlements are included.

If and when the fruits of this package are fully implemented in 2011, that increases to $70.25 a week.

The increases in income allowable before higher tax rates kick in also represent appreciable gains between now and 2012 although, intriguingly, the smallest income threshold adjustments are for middle incomes. The first few thousand of everyone’s income and the last few thousand of wealthy peoples’ incomes are massaged the most in this Budget.

Cullen will inevitably take some stick for the fact that bottom rate tax relief helps everyone, rich and poor alike, which is inherently at odds with this Budget’s tagline: “making the economy fairer for all New Zealanders”. The rich do get a bit richer.

But there are few other ways to trim taxes and keep the system simple than to make tax rates apply universally – which is exactly why there’s no appetite to exempt food, petrol or other essentials of life from GST.

Perhaps more valid would be criticism that this package may do little more than pay back some of the extra tax collected in recent years through “fiscal drag” – where rising incomes attract higher tax because tax thresholds remain unchanged. Treasury officials at the Budget lock-up were under instruction to refer all questions on this important question straight to the Minister’s office.

Nonetheless, to be this generous, the Government will risk going $3.5 billion into the red after years of running cash surpluses. That doesn’t make it wrong – the Crown accounts remain in very respectable shape. But it does make Cullen nervous. He is at pains to emphasise that this is “at the limits of my comfort zone” for additional borrowing and is playing up the fact that he rejected a much more generous alternative package cooked up by the Treasury.

For a start, if the world economy weakens more than is expected – a real possibility – then the cash deficit and consequent borrowing will be that much worse and, presumably, beyond his comfort zone since we will then be “borrowing to pay for the groceries”.

However, what the Budget really does is try to box in the Opposition to the greatest possible extent. With Labour operating at the outer edge of fiscal prudence, John Key is automatically limited to operating within something like the same fiscal enveloped.

That pushes National to differentiate by acts of imagination and leadership rather than competitive largesse.

Sadly, neither major party appears bold enough to confront the really much bigger questions thrown up by low productivity caused in part by massive amounts of low quality government spending, of which plenty more is promised in this Budget. It’s depressing to see more capital set aside for prison-building than capital expenditure on education infrastructure, for example.

So Labour will continue to play its “safe pair of hands” card - this Budget is laden with references to caution, appropriateness, and an appeal to the benefits of managing carefully in good times to allow relief in bad times.

Happily for Labour, all of this is true.

Unhappily, however, none of it is new, and the failure of the railways nationalization as political booster suggests that the electorate has stopped listening to the Clark and Cullen Show. The rail deal was surely the loudest political dog-whistle heard in many a long year with its naked appeal to the disaffected old-school Labour core, with no appreciable lift for Labour in the polls immediately afterwards.

So, while Cullen’s cuts may be at the upper end of what Labour felt it could offer, the reality remains that National can claim it as “the Budget we forced Labour to have” – effectively claiming ownership over Cullen’s strategy while promising a new look on the tired face of the Clark administration.

Differentiation is everything in politics and this looks just like the Budget a National-led Government might deliver – except the Nats might throw a little more in the family wallet and a little less down the drain at the railway station.

On balance, the conclusion from this Budget must be that while it may not be too little, it is almost certainly still too late.

ENDS


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