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Cullen’s first Budget his last?

The lolly-scramble Budget without much lolly

Cullen’s first Budget his last?

I suspect that Michael Cullen’s first Budget could well prove his last.

There are three reasons:

1. Cullen is seriously off-side with business

No government can afford to have a Minister of Finance that business despises, doesn’t trust and doesn’t like. That’s Helen Clark’s problem. A fresh, new Finance Minister is her only hope of salvaging economic credibility.

2. Cullen is off-side with his own caucus

Michael Cullen is not a team player, his colleagues have no ownership of the Budget and his “frontloading” of future spending will put him further offside. There was only polite applause for Cullen delivering his Budget. It was clear his colleagues didn’t feel a part of it, they certainly weren’t excited by it, and they were deeply disappointed by their new Government’s first Budget. Labour Backbench MPs heading back to their electorates to “sell” the Budget complained that they had nothing to sell. It will only get worse. Cullen’s “frontloading” has seen him already announce three-quarters of the extra spending that he is allowing for over three Budgets. The first three-quarters hasn’t exactly set the country alight – his last quarter won’t either. Alliance and Labour MPs are now going to find Michael Cullen proving a bigger tightwad than Bill Birch ever proved to be. This won’t make him popular with Labour supporters or with his caucus.

3. Cullen’s Budget has proved a flop

The failure of Michael Cullen’s first Budget to placate business, excite his cabinet colleagues and caucus, or to chart a clear path for the Labour/Alliance government make obvious what everyone has long suspected. Michael Cullen isn’t up to the job. He has a sharp wit and a good mind, but he lacks the character and vision to be a good Finance Minister. Helen Clark can’t afford this big a flop.

I believe he will be replaced by Phil Goff. Mr Goff has proved himself a safe pair of hands over the crises in the Pacific, he is well-liked, he is trusted. His only problem is that the Alliance and some of his own caucus still regard him as a Rogernome.

No direction, no detail, no vision

Michael Cullen’s Budget follows the “lolly-scramble” approach to public policy where money is flicked out to worthy causes here and there with little accountability or purpose. Such an approach is only works for as long as the money lasts. It saps wealth as the money is invariably wasted and certainly doesn’t earn a sufficient return to justify first the deadweight costs involved in raising the money through the tax system and second the costs of churning it through the bureaucracy.

The “lolly-scramble” approach reinforces the view that the Labour/Alliance government is more interested in redistributing income rather than ensuring that it is generated in the first place.

The Budget offers no overall direction for the government or the country. We remain as confused over what the government ultimately intends as we did upon their election. The Budget set no measurable goals for the government other than spending goals.

The Budget lacks detail. We have no idea how Jim’s Bank is to operate, how R&D grants will be allocated, how the super fund will fend off the cost explosion of New Zealand Super, or even how $20 million is to be spent getting Maori to stop smoking.

The Budget lacks any vision of the good society or even of the good governance that has made it into the Labour and Alliance parties rhetoric for years but which now sees no concrete expression in the most important policy document of the political year.

Growth forecast is low – and why the tax hikes?

The Budget forecasts an average growth rate over three years of 2.5 percent. This compares to the more than five percent rate of growth achieved in the three years before Winston Peters was Treasurer.

The growth outlook is poor. We should be setting our sights on five percent annual growth. That can be done. Less tax and fewer mad rules would do it.

The growth forecasts have to be taken with a pinch of salt. The Treasury say that they have allowed for the impact of renationalising Accident Insurance, hiking taxes and abolishing the Employment Contracts Act. They have to. That’s the law. But they say that each of these major policy reversals have no net impact on growth. This is simply untenable.

Michael Cullen makes much of the fact of his fiscal prudence. He makes that claim because his forecast shows that he’ll take in tax more than the $40 billion he plans to spend each year. I find it hard to equate fiscal prudence with the state spending over a third of what every New Zealander produces and earns.

The forecast surplus for this year is $763 million. For the subsequent four years the forecast is for surpluses of $1,000 million, $2,000 million, $2,700 million and $3,200 million. The forecast extra revenue from hiking the top rate of tax to 39 cents is only $470 million. The hike wasn’t needed to cover the planned spend-up. It was done simply out of spite – an attempt to drag the successful down. A great deal of pain and legislative difficulty could easily have been avoided.

This year’s surplus isn’t the great turn-around it first looks from the previously forecast zero surplus. Fully $500 million of it is due to higher interest rates reducing the liability of ACC and the Government Superannuation Fund.

The $9 billion surplus over the coming four years is just a forecast. Bill Birch back in 1996 was expecting surpluses of $17 billion up ahead. In the event, increased spending combined with lower growth saw them crash to $6 billion. A forecast surplus back then for this year of $6.4 billion completely evaporated.

Closing the gaps

The Government’s overarching goal is to “Close the Gaps”. Michael Cullen may well be achieving this – but not in a way he intended. Our best and brightest are leaving. We are closing the gaps – not by lifting up those who are disadvantaged – but rather by driving off the bright and successful. That’s because of poor economic policy.

The government has been coy about exactly what gaps they want to close and precisely how their policies are supposed to bring about the desired result. They have kept their objective intentionally vague and unmeasurable so that they can never be accused of failure. The goal is a feel-good goal rather than anything serious about what government wants to be held to account over.

We simply don’t know which gaps exactly concern the government and by how much they want to close them. In his Budget Speech, Michael Cullen complained of the “gaps between the skilled and the unskilled, between employment-rich and employment-poor communities, and between the cities and the provinces” as well as the gaps amongst the races.

The focus is unclear and the policy is muddled. The aims should be always to lift up the disadvantaged – not pull down the successful.

The first requirement then becomes to ensure a viable economic framework that will see private enterprise develop and thrive. That’s where our jobs and income come from. This is something that the government has manifestly failed to do.

Second, we must insure that our young people are getting properly skilled. Again, the government has failed. Their abolition of bulk-funding and the return to zoning will disadvantage the children of the poor the most.

Third, we need to ensure that not only are their jobs but that people are motivated to apply for them and to take them. The government’s move to abolish the community wage overturns the one modest attempt there has been to get beneficiaries who are able to work back into the workforce.

The government’s policies don’t match their policy intentions.

The big ticket items

The new government generated expectations that Health and Education would be the big winners with their Budget. In fact, they are the big losers.

Winston Peters in his Budget poured an extra $900 million into health over three years. The Labour/Alliance government is managing only one half of that. Their extra spend up is little over an increase of two percent. That’s hardly going to honour Labour’s pledge to “cut waiting times for surgery”. It will be entirely swallowed up with their return to elected Hospital Boards and their first state pay round.

I told Annette King she was making a mistake going off to Cyprus before the Budget. She will now quickly sour of Michael Cullen as she has to explain to all the needy and worthwhile causes that chase the health dollar that there is simply nothing in the pot.

Education fares no better getting an extra two percent.

The increased funding will be swallowed to little or no good effect.

I believe the problem has been inexperienced Ministers with a non-consultative Minister of Finance and who have missed out simply because they do not understand or care to understand finance and who certainly do not know how a Budget is put together.

They are going to have the next two years to rue their failure.

The Super Fund and Super Debt

The good news is that Michael Cullen has dropped his daft idea of putting all future pension liabilities on the government books as debt. Doing so would have sagged the government books by $170 billion.

The bad news is that he is still convinced that his compulsory super fund is a good idea. He has fleshed out none of the details but Treasury’s technical assumptions highlight the problem: “The rate of return on the assets in the Fund is assumed to be equivalent to the long term Government stock rate”. That means that the Fund contributes no more to state coffers than if it were simply used to pay off debt. Of course, the danger is that the Super Fund doesn’t even perform that well. The planned fund does nothing to improve the security of future pensions.

Dr Cullen’s problem is that he has lifted super without any mechanism to pay for it out into the future.

The way forward

The Budget shows the government to be unable to match its well-meaning intentions with its policies. Student debt provides just one example. The Labour and Alliance parties campaigned to reduce the debt. Once in office they cut the interest charge on any debt students took out while studying. As expected, debt has gone through the roof. The Treasury are predicting that the uptake of debt next year will increase a whopping 113 percent. The uptake of debt by students is expected to more than double.

The increase in student debt this year was forecast to be $260 million. It’s now forecast to be $557 million. That’s what happens when you make money free. They have only made the student debt problem worse – much worse.

Labour and Alliance won the election saying that they could fix social problems by throwing more taxpayers’ money at them. All that they needed to do was to tax the successful a little more.

The Budget proves that they can’t do it.

ACT’s job is not just to discredit the notion that more money is the answer but to build support for the real reforms that will make the difference in health, education and welfare. It’s choice and freedom that empower people – not the nanny state – as we are once again finding out.


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