Politics - Budget Spend-Up Continues (1 June 2009)

“This is the message to New Zealanders: under National, tax cuts are a priority—under National, personal tax cuts are a priority. Most of all, New Zealanders will be able to believe our tax cuts, they will be able to trust our tax cuts. Most of all, our tax cuts will not just be about putting dollars into the pockets of hard-working New Zealanders. They will actually be about delivering the right incentives in the economy. Tax cuts let New Zealanders get ahead in their lives. They encourage New Zealanders to work hard, to get extra responsibilities, to save, and to get further education. We believe in tax cuts, we believe in the power of tax cuts, and we will deliver them.”[1]  - John Key.

Well, that was last year, when John Key delivered the Leader of the Opposition’s speech about the 2008 Budget.

The National Party’s promised tax cuts were the central component of their election campaign. After nine years of taunting Labour for not delivering tax cuts, they were very clear that they would be able to deliver on their promise because the cost of the tax cuts would be covered by cutbacks they were proposing to research and development and KiwiSave: “Taken together, the removal of the R&D tax credits and the changes to KiwiSaver mean National will not have to borrow or cut public services to fund our personal tax cuts. This is a prudent and responsible tax package. National will not undertake additional borrowing for tax cuts.”[2]

So if the cost of tax cuts was already covered by the savings already made, why were they cancelled in Thursday’s budget? The answer is that National cancelled the tax cuts because it was easier than cutting government spending. All those opposition years of explaining that lower flatter taxes are vital to driving economic growth and building prosperity were forgotten when faced with pruning nine years of socialist spending programmes put in place by Labour.

After all of the brave talk of ‘razor gangs’, line-by-line reviews, and reducing wasteful spending, only $301 million was saved; meanwhile core government spending is set to increase from $57,997 million in this 2008/09 financial year to $62,362 million next year, and $65,282 million the year after![3]  

The promised tax cuts – and remember that they were already pre-funded by the cutbacks to KiwiSaver and the dropping of the R&D tax credits – were not massive. Just $98 million was needed to fund the tax cuts next year, $494 million in 2011, and over $800 million thereafter.[4] If the incentive effects of lower flatter taxes are taken into account, the tax cuts should have quickly paid for themselves through higher growth and increased productivity.

That was certainly the experience of the 1984 Labour Government, which, facing bleak economic conditions, dramatically cut taxes and government spending to balance out the deficit within three years. As Roger Douglas put it, “The current level of Government deficit is one third what it was in 1984. Back in 1984, we managed to get the books back into the black within 3 years. Today, with a deficit one third of the size it was then, it is going to take 11 years to get back to surplus. Any deficit today has to be repaid with interest by future generations. The deficit is not huge, but its existence shows the unwillingness to make modest cuts to return to surplus quickly”.[5]

A cursory examination of Thursday’s budget identifies many areas of expenditure which hardly resemble “essential” spending.[6] For instance, does the country really need hundreds of policy analysts costing us close to $600 million a year? Of course government Ministers need policy advice, but does the Minister of Social Development really need $53 million worth of advice, the Minister of Education $32 million worth of advice, or the Minister of Maori Affairs $26 million worth of advice?

In fact, do we really need more than 200 agencies run by the government? Is the Families Commission, which costs $8 million to run, really necessary when there are already many private sector groups doing research on the family and advocating on their behalf? What about the Charities Commission at $5 million, or the Retirement Commission at $5.6 million. In these days of gender equality do we really need a Ministry of Women’s Affairs costing $4.8 million to run? And given the country’s ethnic diversity can we really justify the Ministry of Pacific Island Affairs costing $7.5 million a year to run or the Ministry of Maori Affairs costing $179 million annually.

Should taxpayers really be bailing out stadium projects in Dunedin, Nelson, Christchurch, and Whangarei to the tune of $35 million? And what about the $13 million of taxpayers’ money we will be spending on the Americas Cup in the next twelve months – can that really be justified as essential spending? And why are the producers of big-budget film and television productions getting $35 million?

What about the $158 million appropriated for public broadcasting services – including Television NZ and Radio NZ – or the additional $67 million spent on Maori radio and television services? Are taxpayers getting good value for money for that $225 million?

How do we feel about the $132 million that will be used to fund legal aid? Do we agree with $102 million of taxpayers’ money being used to fund environmental research while $71 million is used for health research?

Keeping in mind that the “unaffordable” tax cuts would have cost $98 million next year, how do we feel about the appropriation of $550 million that has been set aside for climate change? Most of this has been ear-marked for buying carbon credits to give to businesses to get the emissions trading scheme off the ground. Those who believed that the Government was genuinely awaiting the outcome of an “independent” Select Committee review will be disappointed to see that the die is already cast. And consumers worried about the added cost of an emissions trading scheme will be especially concerned to find out that the half a billion dollar cost is only the beginning of what will be an enormously unproductive drain on our already fragile economy.

This appropriation on its own would have almost paid for the tax cuts for the next two years. Unfortunately it demonstrates that rather than looking ahead with a vision for growing the New Zealand economy and catching up to Australia by 2025 – as promised after the election – National appears to have become somewhat captured by the bureaucracy to the point where they are satisfied with tinkering with their predecessor’s socialist spending promises rather than implementing real, badly needed reform.

This week’s NZCPR Guest Commentator Roger Kerr, the executive director of the New Zealand Business Roundtable, outlines the “appalling economic legacy” that has led to the dire situation we are in today:

“Core Crown expenses are set to rise by as much as $3 billion this year and to go up from 32 percent of GDP in 2007/08 to 37 percent in the government’s term of office. Public consumption is forecast to grow every year to 2012 (by around 12 percent in total) while private consumption growth is negative each year (falling by nearly 3.5 percent by 2012).  Citizens are being asked to tighten their belts while the government lets its belt out further”.

He goes on to state, “As commentators have been noting, the government broke a firm election policy commitment in deferring planned tax cuts.  This looks like a soft option relative to cutting more of the last government’s poor quality spending.  None of the modest ‘line-by-line’ review savings represents hard political choices either.

“What was perhaps most disappointing about the budget was that it contained few indications of forward thinking to deal with the need for structural adjustment and substantially lift productivity growth.  There should also be more urgent short-term action. The forecast rise in the unemployment rate to 8 or even 10 percent of the labour force, for example, should not be passively accepted.  It is an indicator that nothing significant in this regard came out of the Jobs Summit and that more fundamental changes are needed.

“Overall, what can be said at this stage is that the budget does not have an economic strategy that is capable of achieving the government’s overriding goal of catching up to Australian income levels by 2025”.

So rather than provide a clear vision for how New Zealand is going to become that prosperous country that we all aspire to, with lower taxes, greater personal responsibility and more individual freedom, the budget gave us a stable credit rating, aspirational rhetoric, and no tax cuts.

But all is not lost - we did get a $50 million cycle-way. And we mustn’t forget the sweetener to the Green Party, the $323 million for home insulation refits. The problem with those, however, is that if you read the study on which they are justified you will find that general practitioner and hospital records fail to show any real evidence to support the policy. In other words, while people in insulated homes ‘feel’ healthier there is no empirical evidence to show that they actually are.[7]

I will leave the final word to Milton Friedman: "I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, "How do you hold down government spending?" The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes."

Read more from New Zealand Centre of Political Research.

FOOTNOTES:
All articles can be found on the NZCPR RESEARCH PAGE
1.John Key, Budget Debate 2008
2.Treasury, Core Crown Expense Tables
3.National’s 2008 Election Tax Policy
4.Radio NZ, Government defers promised tax cuts in Budget
5.Roger Douglas, Budget Low-Lights
6.Treasury, Estimates of Appropriations
7.British Medical Journal, Effect of insulating existing houses on health inequality

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