25 May 2008
Election Year Budget lacks Vision
“The cupboard is bare”… “I’ve not merely stolen their fox I’ve eviscerated it, strangled it and thrown it into their back garden.” These were the retorts of Finance Minister Michael Cullen during the Parliamentary Debate on the 2008 Budget.
These comments are both disturbing and revealing; they not only show that Labour’s tax cuts are more about the future of the Labour Party than the future of New Zealand, but they also reveal the deep disdain that Dr Cullen holds for the right of hard working taxpayers to keep their own money.
Many New Zealanders are feeling the pain of the escalating price of food, runaway petrol prices, and interest rates that have risen some 60 percent since Labour has been the government 1. As the Governor of the Reserve Bank has frequently noted, one of the key drivers of those interest rate hikes has been Labour’s nine year spending spree. Over that period government spending has doubled, putting huge inflationary pressure on the economy.
The problem created by the government’s profligate spending has been exacerbated by the fact that far too much of the spending has been wasteful. This has been such a concern to Treasury that in their briefing notes to the incoming government they warned: “There is little information to indicate that NewZealanders are getting more services and better results from the public sector for the large increase in resources provided. What little information exists is not encouraging. Ministers and the public are frequently surprised by poor performance. One of the few output measures is the volume of hospital patient discharges. In the three years up to 2003/04 these rose by about 5%, compared with a 21% growth in hospital spending. It is difficult to tell what improvements in health outcomes or services have been achieved for the additional expenditure on health, and whether NewZealanders are getting value for money.”2
The reality is that in 1999 Labour inherited an economy that was growing strongly. They have reaped record surpluses year after year. Regrettably they always found a reason why paying a dividend to taxpayers in the form of tax cuts was unaffordable. They have only discovered their present enthusiasm for tax cuts because they see it as the only way to avoid electoral annihilation. The irony is that their new-found enthusiasm for tax cuts comes at a time when the economy is sliding and the surpluses are shrinking.
The Labour Party is deeply rooted in socialist ideology. Their core underlying philosophy does not gel with the majority of New Zealanders who resent the growth of a bigger and more powerful government at their expense. They do not like the endless imposition of nanny-state regulations telling them what to eat, what to say, and how to bring up their children. Nor do they like feeling like slaves in their own country, having to watch their families get poorer as living standards fall until finally those that can, pack up to find better opportunities abroad.
Labour has becomes old and tired, and the cracks – demonstrated by Phil Goff’s revelations that he has his eye on the top job after they lose the election – are starting to show.
Roger Kerr, the Executive Director of the Business Roundtable, and this week’s NZCPR Guest Commentator, in his analysis of the Budget “An Analysis of Failure”, puts it this way:
“What should stand out to New Zealanders is just how little we have made of our tremendous good fortune over the last few years. In many ways the current decade feels like a re-run of the 1960s – the Holyoake years, which we look back on as a time of complacency and squandered opportunities”.
Roger explains how Labour has repeatedly stated that their “top priority” goal has been to lift New Zealand back into the top half of the OECD, but that the words have been hollow rhetoric: “The current government has been unequivocal about its top priority goal: to get New Zealand back into the top half of the OECD income range. Prime Minister Helen Clark reaffirmed that goal in parliament earlier this year. Finance minister Michael Cullen has said that the government needs to achieve 4% plus annual growth in real GDP on a sustained basis to achieve it.
“Measured against this “top priority” goal, the budget is an admission of failure. Indeed, the goal is not even mentioned. It is not difficult to understand why. The economy’s average growth rate is falling, not rising. Over the so-called forecast period (the next four years) annual growth in real GDP is expected to average only 2.5%. At that anaemic rate New Zealand will be lucky not to fall further down the OECD income ladder, and the income gap with Australia will almost certainly widen”. To read Roger’s excellent review of Budget 2008, click here
The problem that the country now faces is that Labour’s changes to the structure of the tax system are highly progressive and as such they are the antithesis of what is needed to grow our economy and improve our living standards. That is not to say that the tax relief will not be welcome – it will. On October 1st, the tax cuts will put an extra $12 into the paypacket of someone with an annual income of $20,000 a year, $16 for someone on $40,000 a year, and $28 for someone on $80,000. It will also bring forward the Working for Families inflation adjustments of $4 a child from April next year to October 1st 3. But the opportunity to set New Zealand onto a strong path to growth has been wasted.
Fast, sustained growth does not happen spontaneously. It requires a long-term commitment by a country’s political leaders to pursue policies that encourage prosperity. And the right tax policy for growth is not progressive but flat.
The research is overwhelming on this – lower, flatter tax systems create a direct incentive for people to improve their productivity by working harder and smarter. It also encourages investment and entrepreneurship, two other key factors necessary for growth. That’s why tax cuts that create a lower, flatter system are not inflationary, while tax cuts that make the tax system more progressive are.
That is also why there has been so much support for personal taxes to be aligned with company tax – at 30 percent. Such a move would have given a welcome boost to the hundreds of thousands of small businesses that pay tax at the higher personal rates and have therefore missed out on any benefit from the much vaunted lowering of company tax. A large proportion of this sort of tax cut would have flowed directly into desperately needed productivity gains for the country.
As a result of Labour’s progressive tax cuts, economists are anticipating that the expected lowering of interest rates by the Reserve Bank in September, to stimulate the economy, will be put on hold. They have estimated that the higher interest rates will all but cancel out the tax cuts.
After nine long years of a backward looking government that still blames National for its own failure, surely it is time for a fresh start for New Zealand. We need vibrant and visionary leadership to not only grow our
economy and lift our living standards, but to inspire and unite a society that has been wounded by years of divide and rule, political correctness and an excessive appeasement of minority interests at the expense of the majority.
That means leadership that will encourage respect for our differences but will unite us towards a future where participation is not enough, where winning and striving is the name of the game, and where we can rekindle our excitement for the future and our faith in New Zealand as the very best place in the world to work, live and raise our families.
This week’s poll asks: Do Michael Cullen’s tax cuts meet your expectations? Go to Poll
FOOTNOTES:
1. 1, According to the Reserve Bank, variable house mortgage rates have increased from 6.69 percent in November 1999 to around 10.71 percent today.
2.2. Treasury Briefing Papers to the Incoming Government
http://www.treasury.govt.nz/briefings/2005/chap4-1.asp
3. 3. Budget 2008, Key Facts for Taxpayers
http://www.treasury.govt.nz/budget/2008 axpayers/01.htm#personal
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