Cullen's Cannily Constructed Budget

In better times, this cannily structured Budget would have been a circuit breaker for Labour - but given the current levels of public disenchantment with the Government. Finance Minister Michael Cullen's ninth budget will probably be greeted grudgingly by the public, as a plea bargain at best. Some of this Budget's strongest benefits for Labour will come later on the campaign trail, during the toe to toe contrasts with what National will have by then, needed to put on the table.

Certainly, Cullen has made the best of a difficult hand. Against a gloomy backdrop of the slowdown in the domestic economy and rising global fuel and food prices, he has found the room to deliver - with a little something for everyone and substantial gains where it matters. Namely, tax cuts of $43 a week for average income families from October 1, rising to $85 a week from April 2011. To put this another way : the Budget cuts taxes by a quarter of current levels for those on the full time minimum wage, by one sixth for those on the fulltime average wage, and by one eighth for those earning over $80,000.

By altering the tax thresholds, Cullen has not only delivered relief in proportion to where it is most needed, but given an inducement for voters to come back for more. Both the method and the outcome are in stark contrast to National's approach of 'across the board' cuts in tax rates approach that John Key has continued to tout this year - and which would have given $12 a week relief to the poor, and $92 a week to the better off. Cullen has in fact, trumped Key by delivering something very close to the "north of $50' relief to a fair chunk of the electorate.

One political outcome is that by altering the impact of the lower tax thresholds, Cullen has delivered relief to those people living on retirement investment income. Labour can choose either to use this pre-election to make inroads into Winston Peters' core constituency, or to make a case for co-operation with the NZF leader, post election.

Fine. There will be a lot of noise about this being the first cash deficit Budget for yonks, and about Cullen's prior criticism that National would have had to borrow for tax cuts - and now look, Labour is doing the same. To which one could reply that the scale is vastly different - what Key was talking about would cost about $5 billion a year. For half that annual cost, Labour can argue that a much bigger chunk of its package is earmarked for virtuous capital investment - it unveiled in this Budget for instance, a far saner, much more competitive solution on telecommunications than National's mooted $1.5 billion spend-up on broadband. Also, debt levels as a ratio to GDP( p 96) remain very healthy, so the debt criticism doesn't really hold much water.

The more substantial criticism is about the consequences of this $10.6 billion tax package ( over the four year forecast period) for (a) inflation and (b) interest rates? Truly, there are some very heroic assumptions made about CPI forecasts - a brief surge to 3% in 2010, but otherwise would you believe, the CPI index rises are picked to stay at 2.6 % for the foreseeable. If you believe that, I have a bridge in Brooklyn going cheap up on Trade Me. Similar very willful optimism is evident about forecasts for labour productivity growth and unemployment ( page 60).

Overall, these are minor crimes. Given the slowdown in the economy, Cullen is gambling that Reserve Bank governor Allan Bollard will treat this level of phased in tax cuts as a gradual and sustainable stimulus to economic activity . Obviously, the political gamble involved in this trade-off is crucial : in poll after poll, voters have insisted they don't want tax cuts if that results in hikes to prices and to mortgage interest rates.

Are there fish hooks in the economic data ? You bet. If National does win the election there is a nasty surprise flagged (p 39( near the end of Cullen's speech. The out-year spending allowance has been lowered to $1.75 billion from Budget 2009, and as Cullen says " this will be a hard target to meet, requiring re-prioritisation efforts." You bet. In other words, if Cullen is being Santa Claus in 2008, he plans on reverting to skinflint Scrooge next year if re-elected - and if he isn't re-elected, Key is probably going to have to cut public services to pay for this year's largesse. By how much ? Well, that's flagged on page 155 to the tune of half a billion dollars in each successive year to 2012. Very neat. National has been set up to be a one term government.

At the other end of the income scale, the tax advantages to those on low and middle incomes has occurred in a climate of ongoing neglect of beneficiaries. Sure the tax threshold changes will help some of them - but this doesn't justify the reductions in some key beneficiary areas. The amounts allocated for sickness benefits, widows benefits, unemployment benefits, and most outrageously special circumstances assistance have all been reduced.

Given that money has somehow been found in this Budget for a brand new $27 million fund over several years to help New Zealand's local film-makers, this kind of tight-fistedness being shown to the most needy is shameful for a Labour government.

Over the next few days, Scoop will be going through detail of the major areas - health, education, infrastructure spending etc . For now, Cullen can be satisfied with what he has accomplished here. Fighting out of a corner and written off as an election liability, Cullen will never bee the electorate's pin-up buy - but in this Budget, he has given the Government some choice pieces of ammunition for the battles that lie ahead.

ENDS

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