Back in the heat of last year’s election campaign, I posted twice on the subject of tax cuts
here and
here and a rather tongue in cheek follow-up
here.
The first of these posts was at the time that National had posted quite a firm lead in the campaign, with their promise of tax cuts for all. In particular,
Much as I hate the thought, I do not believe that John Keys (I will have to think of a quick name for him now – Jonkey comes to mind) is going to have some very major problems to contend with –
Wage pressure inflation
Imported inflation as fuel prices increase and the exchange rate declines
Accomodation cost pressures as land banking investment resumes.
Increasing industrial action in support of increased wages.
Yeah, there y’go Jonkey. Homework for the next twelve months… I don’t think you have it right either. Not by a very long piece of chalk. There are holes in your party’s policies that are the result of thinking that is just too simplistic, just too pat to hold any hope of viability.
Why revisit this now?
Well there are two reasons really.
The first comes from the prognostications of the local market analysts on the possible effects the US twin deficit
s might have on the global economy. In very general terms the impact is seen as major international inflation arising from the combination of oil prices and energy prices generally (the major factor), the attempts by the US to decrease its trade deficit by means of increasing exports and decreasing import demand (the same problem as NZ has) by artificially depressing the exchange relativities of the USD, and increasing interest rates to attract investment needed to offset the mounting internal deficit.
The second comes from a debate I had with (I think) Dave Justus on fiscal responsibility. I was promoting the general principles as they hold here in NZ.
Then last week Brian Easton came to light in the Listener, with a column that would have been written prior to this year’s Budget and published at the beginning of Budget week.
Easton makes two comments (other than in passing proving once again that I get the detail wrong).
Today there is a general consensus on the orthodoxy of fiscal conservatism, although there are disagreements over other aspects of fiscal policy. (One lobby wants lower taxation paid for by lower government spending.) The Treasury is fiscally conservative again, and the current Minister of Finance, Michael Cullen, is also a committed conservative – in this dimension, anyway.
Sadly, most journalistic commentators are not. You will see it in the headlines after the coming Budget when Cullen will be called “Scrooge”. But he will run as large a fiscal deficit as he dares, using any additional available funds for public spending on health, education, prisons and so on, rather than cutting tax. You, or any commentator with a different political stance, may favour cutting income taxes rather than increasing spending. But that is not saying that the fiscal deficit should blow out.
And he concludes –
But if election policies are any indication, it is National that is unorthodox, all the more surprisingly, given that the party is led by the major beneficiary from fiscal conservatism, Brash. Richardson must have wept when she saw the party’s 2005 promises of tax cuts, spending increases and guarantees not to cut some of the biggest sectors. Had National’s policy been implemented, the exchange rate would have risen, the export sector would have been crushed, and economic stagnation would have followed. And it is so hard to regain fiscal discipline, as Richardson knows.
National’s excuse might be that the official data came out too close to the election for them to do their sums. That was over six months ago. So let them publish their own Budget showing the deficit that they would generate after their tax cuts and spending plans. If they keep to their manifesto promises, they will be shamed out of court.
To explain the reference to (Ruth) Richardson, it was she who delivered “The Mother of ALL Budgets”; this was the opening consequence in the Bolger National government to the profligacy that afflicted the late years of the Lange Labour government. (and that was the detail I got wrong). It was a Budget that (like few before including Nordmeyer’s “Black Budget”, and the swing to the right of the first years of the Lange government under the financial management of Roger Douglas later to become “Rogernomics”) had to correct major imbalances and mismanagements of previous administrations.
OK, so the two points that come out of this, and Easton deserves far more credit for pointing this out that I think he will ever get.
First the power of the MSM in championing the popular rather than the right or the advisable. Where that power of the MSM and policies of a political party coincide comes the likelihood of MSM turning an election.
Easton also gives a brief but very clear picture of the economic mechanism that links the deficit with the orthodoxy of prudent fiscal management. It is a picture that American readers would do well to keep to the forefront of their minds later this year and again in 30 months time.
The deficit? Isn’t there a huge operating surplus in the government accounts? Well, yes, as measured, but most of that is then spent on capital investment and the like. So NO, really. The true fiscal deficit, the government’s net impact on the economy, is probably near zero for this stage in the business cycle. …
I guess it is simple really. No one likes bad news. Everyone likes good news when it is a windfall benefit to them.
That is not to say that I like the alternative that the Labour government has put in place and which Easton makes no comment on. One thing is certain. When the current Labour government loses the Treasury benches, this country will be in for a major shake up at all levels and in all manner of ways.
The redistribution of income has become so pervasive, so extensive that it is already creating major stresses within the economy.
The headline to this comes through the “living allowance” provisions of the new welfare. Essentially the government is using income and family measures to set the distribution of welfare. Nominally, my son (who earns in excess of $75,000 or about USD45,000 p.a.) could qualify for government assistance if he had some six or seven children. Fortunately for him he at present has only one. But if we look down the scale further, the welfare assistance to a family with three kids on an annual income of $28,000 (under USD18,000) is quite extensive. Rent relief, living expenses all figure in the mix. The effect (
you can try it for yourself here) is to add some $9,000 to the family’s take home pay.
Now I can tell you that if that family is living in Auckland, living on less than $40,000 (before tax) , then they are going to find it very tight. There will not be a lot to come and go on. Rent for a start could exceed $300 per week for a basic, not too flash, you can’t choose your neighbours, 3 bedroom house.
At the moment, that worker can live in reasonable comfort and keep a paying job.
The “cost” is insidious.
There is a change of government. The new government introduces tax cuts, which it very responsibly puts in place by moving the marginal tax breaks so that minimum tax (9%) is paid from the first $20,000 of income, the 19% rate applies from there to $40,000… So that family’s annual tax bill would go from $5640 to perhaps $1700, an increase in available income of $3950. In return they “lose” their right to $9,000 of “income”. So, a 60% tax cut and a decrease in net income of almost 20%.
THAT, dear readers has stirred the bowels to the extent that I think I should patent this as the latest in laxatives.
I wonder when Easton might pick that thread and pull it…
