The Do Nothing Budget of 2003
Weekly Column by Dr Muriel Newman
Do you remember the days when budgets were exciting? Evening meetings of people huddled around the radio or television - complete with invited experts to explain what everything meant. The public galleries in Parliament were packed. New Zealanders stocked up on petrol and booze just in case excise taxes were increased.
These days, budgets are ho-hum affairs. Crafty governments now put up excise taxes before the budget – getting the bad news out of the way! The public galleries in Parliament are empty, and even the press gallery is only half full. Budget pronouncements cover three-to-four-year timeframes so it’s almost impossible to tell whether the spending announced is new spending or just last year’s spending re-announced.
This year even the overall financial situation remains hazy – is it really a $4 billion surplus or is it in fact a $1.3 billion surplus? Having listened to the Finance Minister’s explanation this morning, I don’t think anyone is any the clearer.
The Minister started out his budget speech crowing about a $4 billion surplus. Isn’t it ironic that, like Tony Blair in the UK and indeed Bill Clinton in the US, left-wing politicians come to power following the fall from grace of free-market reformers (Roger Douglas and Ruth Richardson here, Margaret Thatcher in the UK and Ronald Reagan in the US), reaping the benefits of their economic liberalisation programmes. This Labour government can claim little of the economic growth that produced the surplus, except for the fact that they did not reverse those earlier reforms.
The reality is that since 1999, good weather, a low dollar and an immigration boost have been the drivers of our economy. The good weather was luck, the low dollar was caused by a landslide in confidence when Labour took office, and the immigration boost followed by a housing boom was caused by a miscalculation of immigrant numbers by the government.
The future does not look bright – the drought, power shortages, SARS and international unrest are all predicted to impact negatively on the economy. That is why ACT New Zealand believes a prudent government should look to emulate the Australian Minister of Finance, who, when faced with a surplus, realised that it meant that his government had taken too much tax and that tax cuts were necessary to return some of the money.
ACT has surveyed hundreds of thousands of people up and down the country to find out what they think of government surpluses. Overwhelmingly New Zealanders believe that some of the money should be returned to those who made it. They think that a government that is running surpluses is taxing people too heavily, and the appropriate response should be to lower taxes. Those surveyed believe the best option for lowering taxes would be to follow the recommendations of the government’s own McLeod Tax Revue – a bottom tax rate of 18 percent, with the top rate and company tax set at 25 percent.
Personally I like the regime in Colorado, USA, where a Taxpayer Bill of Rights caps state government spending at the rate of population growth plus inflation, and requires immediate refunds of surpluses to taxpayers.
If this ‘over-taxation’ were returned to New Zealanders, the average family would be $50 a week better off – that’s a welcome $2,600 per household.
Thanks to inflation, the number of people who now pay the top rate of tax has risen from 5 percent of the population to 18 percent. As a small English-speaking country with a culture that encourages young people to travel widely, New Zealand cannot afford uncompetitive tax rates. In a modern world, tax increases in our nation increase the supply of ambitious New Zealanders in Australia and London.
In the budget, the government announced it was going to allocate a further $2.1 billion to the Cullen superannuation fund, to be invested on international sharemarkets. Rather than investing overseas at a time when the world economy is looking decidedly shaky, wouldn’t it make far more sense to invest it in New Zealand infrastructure development?
Using some of that money to invest in roading and power generation, for example – in order to gain a secure return on investment of around 7 percent and at the same time removing some of our major constraints of growth - would make far more sense than gambling the money offshore, especially in light of the negative growth experienced by the government superannuation pension fund. Next year’s expected dive in growth to half our present rate is a serious risk factor for our economy. A prudent government would abandon its strategy of picking winners (such as giving $34 million to the America’s Cup challenge while leaving community sports to starve, especially once local gaming proceeds are syphoned off to Wellington) and buying votes as signalled for next year’s big welfare budget, in favour of taking steps to position the economy to weather the storm ahead.
Healthy tax cuts for businesses and families, a massive reduction in the compliance costs that are strangling small business, and welfare reform to ensure that the unemployed are engaged in organised days of work, training or job search, would transform our future from one of uncertainty, at the whim of external forces, to one that is firmly on a path to growth. I know which approach I would take. Do you?