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Roger Kerr

It’s Not Your Money, Dr Cullen

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A commentator recently wrote as follows:

The notion that it is better to allow people to keep more of their own money than to snatch it from them as tax and then return it to them as a credit against that tax, is alien to a man who really believes that the national income is his, and it is for him to decide how much of his money to share with citizens.

The man in question was not finance minister Michael Cullen, though it could have been. Rather, it was Gordon Brown, the British chancellor of the exchequer and soon to be prime minister when Tony Blair steps down next month.

The parallels between the two are striking. There were no reductions in personal taxes in this year’s budget, even though polls indicate most New Zealanders are calling for them. Dr Cullen misleadingly represents the Working for Families scheme as a tax reduction, but it does nothing to reduce overall taxation. It effectively involves ‘snatching’ money as tax and returning it as a handout, often to the very people (middle and higher income earners with families) who paid the tax in the first place.

The parallels go further. In his first term of office, Gordon Brown kept a lid on government spending, as did Dr Cullen. Since then, spending and taxation have blown out in both countries. Both governments now take roughly 43 percent of their nations’ income in taxation, virtually the same proportion as in the bloated welfare state of Germany .

And in respect of the welfare state in Britain , the commentator quoted earlier suggested middle class support for it is waning:

That support rested on two pillars. The first was a (mistaken) belief on the part of the middle class that the value of the direct benefits they received exceeded the taxes extracted from them. These benefits were always recognised explicitly by the Left as a necessity – an unfortunate one, but a necessity nevertheless – to buy voter support for the redistribution that is at the heart of the welfare state. Unfortunately for Brown, he has used up his bribe money: he can’t afford any more goodies for the middle class, on which he has loaded a succession of tax increases. And he has presided over the pouring of huge sums down the rat hole of an unreformed health service.

Spot another parallel: health was the main recipient of Dr Cullen’s spending largesse in the budget, yet Treasury analysis suggests productivity in the government-run health system is falling.

Dr Cullen’s mindset was revealed recently when he told the Dominion Post: “If you give most people a tax cut, they will spend it.” Give!? The money is not his to give. The government did not work to earn it. And who is he to tell people that they should not spend what they have earned? The largest and most wasteful spender in the country is undoubtedly central government.

Dr Cullen has conned too many people into believing there is no right time to cut tax: it only stokes the inflationary fires and pushes up interest rates. Or at best taxes can only be cut if the economy is flat on its back, and can do with some life-preserving ‘stimulus’.

This is absurd. The Howard government In Australia has cut taxes five years in succession without igniting inflation. Here the government has raised tax burdens enormously, and reignited inflationary pressures.

Dr Cullen’s specious argument makes him the slave of a now-defunct economist – John Maynard Keynes – whose closed economy theory of demand-pull inflation was discredited by the stagflation of the 1970s.

Economists have long since accepted Milton Friedman’s argument that monetary policy – ‘printing money’ – is the single cause of inflation, whether in boom times or in recession. Inflation is about too much money chasing too few goods. So the first requirement for non-inflationary growth is for the Reserve Bank to run a sound monetary policy. Inflationary pressures in New Zealand can be also eased by addressing the problem of too few goods – by increasing the productive capacity of the economy through lower taxes and other measures that would help reverse the alarming decline in business sector productivity growth since the government took office.

Regrettably, we saw few moves in the budget towards a better fiscal and economic strategy. Government spending continues to grow rapidly without any evident attention to whether it represents value for money to taxpayers. The cut in company tax was overdue but it is a baby step and doesn’t help the many businesses that are not companies. The McLeod tax review principles of lowering top personal and other tax rates to align with the company and trust rates were not followed.

And far from moving towards a freer environment which is necessary for growth, we saw another Nanny State intrusion in the form of a KiwiSaver scheme that includes a compulsory employer element. Once again freedoms and responsibilities are ignored, and there is no free lunch for workers. The burden of compulsory increases in the cost of employment will fall eventually on labour through lower take-home pay, fewer non-wage benefits, or higher consumer prices. Employees will be dissatisfied and employers frustrated. Further regulation to deal with unintended consequences is virtually guaranteed.

The bottom line in the budget is that the combination of excessive government spending, taxation and regulation is dragging down the economy’s growth rate. Far from GDP growth accelerating to Dr Cullen’s target of 4 percent a year or more, necessary to haul New Zealand back up the OECD income ladder, the medium-term outlook is for an average growth rate of just 2.5 percent. Dr Cullen’s legacy is likely to be that of a failed finance minister who inherited the highly successful reforms of the 1980s and early 1990s and largely squandered the gains.