Rod Oram: Cullen's Budget on the money

Last updated 00:21 25/05/2008

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Rod Oram

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ALL GOVERNMENT budgets should be judged by three criteria: politics, economics and strategy. With his ninth budget, Finance Minister Dr Michael Cullen has reaped the rewards of his long-term strategy of fiscal prudence to deliver on the politics and economics.

On politics, he has offered taxpayers the maximum he felt he could, given his own cautious instincts and warnings from the likes of the International Monetary Fund. The IMF said last week that the government should conserve its revenues because sources such as corporate tax and GST are slowing with the economy.

Offering voters $1.5 billion of tax reductions this October and $10.6b by April 2011 won't alone save Labour at the election. No sensible budget could. To rebuild public support, the party will have to campaign convincingly on many fronts. And it may have already left it too late to start.

But Cullen's budget is politically astute because he has given National little room for manoeuvre. The opposition will struggle to offer a credible alternative. Promises of bigger cuts later won't do the job. But much bigger tax cuts sooner would spook many voters with the spectre of less spending and more government debt.

Theoretically, National could seize the budget high ground by unveiling a radical overhaul of the tax system. For example, it could help lower-income families directly through tax coding rather than through Labour's bureaucratic rebates through Working for Families.

But it would be difficult to design and hard to sell because of voters' bad, long memories of National's previous attempts at being fiscally radical in the early-1990s. Moreover, National is deeply risk-averse. It believes this is Labour's election to lose thanks to strong anti-government feeling rather than its to win with a bold alternative agenda.

On economics, Cullen can afford to do what a good finance minister should: help smooth out the economic cycle by stimulating sluggish activity. Having run budget surpluses of 3-6% of GDP during the boom times, he can now afford to reduce them to well under 1% over the next four years and spend the money on tax cuts and a moderate increase in spending.

And because Cullen has halved government debt as a percentage of GDP since Labour came to office in 1999, he can afford to borrow a bit more now. The increase, some $3.5b a year for the next four years, will see debt stabilise at 17.5% of GDP. Only a handful of developed countries enjoy a lower level.

But Cullen's plan carries a big risk. In an ideal world, Labour wants to go into the election with voters feeling slightly more cheerful thanks to modest tax cuts and the first reduction in interest rates. For large mortgage payers, the latter will help their finances far more than the former.

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The chances are slim, though, of Labour getting its wish. The budget will give the economy a fiscal boost equal to 2.3% of GDP in the 2008-09 financial year. This is the biggest government stimulus since 1997 and it could force the Reserve Bank to keep interest rates higher, longer to contain inflation.

The problem is not just the budget stimulus. The Reserve Bank must also contend with rising food and fuel prices and the possibility of a weakening dollar, which will make imports of those essentials more expensive.

If it formed the next government, National would face the same economic pressures when it presented its first budget. A deep tax cut would be a big fiscal stimulus but it could pay for them and reduce the stimulus by cutting spending.

It will argue, as it did at the last election, that it can do so because some of Labour's spending is wasteful. But it remains to be seen whether it can convince voters it can spend less than Labour but, thanks to better management, improve the quality and quantity of services such as health and education.

Again, theoretically, National could make such a case. But it would need to unveil a big suite of quite radical policies across government to do so. That would amount to nothing less than reinventing the way government is run.

Bill English, National's deputy leader and finance spokesman, expresses some interest in running government along similar models and disciplines as good service businesses in the corporate sector. But he sees that as a long-term goal for a National government. Clearly, he, his leader and caucus have no desire to be so bold at this election.

Of all three criteria by which to judge a budget, strategy is by far the most important for the long haul. This is more than just the fiscal strategy, which in Cullen's case has allowed him to play his political and economic cards. More importantly, it is the sense of purpose and priorities on which any government invests in the future.

On these, Cullen and his colleagues have been clear and consistent through nine budgets. Their main goals are to help improve the lot of New Zealanders, help build economic capability and to help forge national identity. A fiscal approach based on running large surpluses, reluctance to cut taxes and willingness to invest is only the means to those ends.

Earlier budgets delivered building blocks such as the Superannuation Fund and Kiwisaver, big increases in health funding, much more money on education in the likes of early childhood programmes, the re-establishment of apprenticeships and workplace skills programmes, economic development strategies and programmes, a big increase in help for companies exporting or investing overseas, research and development tax breaks, a reduction in corporate taxes and increased investment in the arts.

This budget continues to deliver on those themes and business, among other sectors, is once again the beneficiary: another $168m over four years for workplace training, $165m more support for companies reaching out overseas, $350m over five years to help roll-out broadband in a highly targeted way to those who need it the most businesses, universities, schools, hospitals and rural areas, $700m-$1b for the Fast Forward fund for research and development in the primary sector and $40.5m for a new Maori business development agency.

Between now and the election it is critically important voters analyse and debate the impact these economic and social strategies have had.

But for it to be a genuine debate, National needs to unveil its own big, deep strategy the principles, priorities and practical policies that will shape the architecture of its budgets and drive its investment in the nation if it forms the next government.

So far it has done nothing of the kind. It keeps promising it will but nearer the election. That runs a big risk for National. It might overwhelm voters with too many proposals at the last minute for them to give them fair evaluation. Or under-whelm them if the policies look a lot like Labour's.

But the biggest worry of all is one for voters. Has National actually been doing enough deep thinking about how it will use government power?

The signs aren't promising. For example, John Key told this columnist in March that his party was planning a "stunning" set of policies to fast-forward New Zealand's economic development.

Yet so far it's only promise is to spend $1.5b to run fibre optic cables to households. But this plan is widely dismissed in the telecommunications sector for pouring money into the lowest priority area, for entrenching Telecom's dominance and for crowding out other investors.

Quite simply, National has not contributed at all to the national debate that has reshaped the telecommunications sector in the nine years it has been in opposition. Its naivete and ignorance shows.

If we are to have a real election debate about the future of the country, then National will have to show it has the policies and political confidence to offer a genuinely better alternative to Labour.

Promises of running something similar to Labour but better isn't good enough.

Until National delivers the goods, Labour's ninth budget looks the best that any party can deliver in terms of the three criteria of politics, economics and strategy.

 

 

- © Fairfax NZ News

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