The worst thing about Budget 2010 is that was so predictable. What’s not so predictable is its sustainability

Bill English promised his second budget would be solid and sensible. The only real surprises were that he (slightly) under-promised and (slightly) over-delivered on personal tax reductions and managed to steal a march on the Australians with a company tax reduction that would have been unavoidable sooner or later.

The rest of the major changes had either been spelled out in detail or, at least, signalled in advance: the GST increase covered by tax reductions; the closing of the loopholes that let asset-rich New Zealanders minimise their income to the point where they claimed assistance from the seriously flawed Working for Families scheme while they waited for their untaxed capital gains; the boost for business-related science and technology; and the capping of runaway costs in early childhood and tertiary education.

The response has been equally predictable. From the right, the call is for bolder “step change”; from the centre, it’s a step in the right direction; and from the left, the idea of Telecom’s chief executive walking home with an extra $2,600 a week, compared to the average wage-earner’s gain of 35 cents a week is a red rag to the roaring bulls.

Phil Goff’s post-Budget speech in the House could have been taken as read. He’d rehearsed much of its content many times before. He must have seen Christmas coming when John Key started softening up the electorate for the reduction in top personal tax rates earlier this month. That “don’t envy the rich – we need them” line would have resurrected memories of Ruth Richardson cheerily talking up the “mother of all budgets” as she went in to sock it to the beneficiaries. Here was another chance to wheel out his new campaign line: Labour's commitment will be more money in the pockets of the many, not the few. And away he went.

Key was ready for him with a speech that cemented Goff to the same Cabinet table with Roger Douglas when he delivered personal tax relief for the rich, with David Caygill when he suddenly introduced an uncompensated increase in GST in 1989, and with Michael Cullen when he sat and watched while the asset-rich started digging their bolt-holes to minimise their tax liability and began mining the WFF welfare scheme that was set up to substitute for low and middle income personal tax reductions.

Unfortunately for Phil, he now lives with an “axe the tax” slogan on GST that he is not confident enough to convert into a policy commitment, and he is not able to explain exactly where the money will come from to create the “smart, high skills, high wage” economy he wants so he can put “more money in the pockets of the many” after he reinstates the top income bracket tax rate that Key is reducing.

Unfortunately for the rest of us, the Key Government may also run into similar problems.

The Treasury Budget Economic and Fiscal Update predicts government policy changes will drive a spike in inflation over the next year. In June, the tobacco tax will bump it up by 0.5%. In July, the Emissions Trading Scheme will jump it by another 0.4%. In July, ACC levies on motorists will lump it with another 0.1%. And in October, the GST hike will pump it by another 2%.

Inflation is expected to rise close to 6 percent for the year ending March 2011. Where inflation goes, interest rates and exchange rates will surely follow under New Zealand’s prevailing monetary policy. There is enough pain waiting around the corner to wipe away the feel-good effect of the latest Budget before the election in 2011.

The other negative political factor that will emerge over time is the impact of the budget cutting and switching within government agencies to eliminate all that “low quality spending” Bill English keeps talking about.

Since this is the first time that the chief executives in the state services have been encouraged to suggest their own budget cuts we must expect that there have been a few slips of the knife during the operation.

Reading through the individual vote estimates in the Budget never reveals the full story. We will only hear about the injuries when the wounded start screaming. However, governments can suffer death from a thousand small cuts, just like anyone else – and there will be screaming to come.

The big unknown is whether the wider world economy has stabilised to the point where New Zealand can feel assured that we are not going to be engulfed by another financial tsunami sweeping out of Europe, the United States, or Asia. The Greek economic crisis, extended across the continent, is far from solved. The latest news from the job and politics fronts in the United States is far from encouraging. And there is growing nervousness about the property bubble emerging in China – the major market that has underpinned the recovery in our export trade.

There is one certainty in all this: global competition for funds – between governments, banks, corporates and private borrowers – is going to intensify.

The sound and sensible thing to do is to plan for a more subdued and somewhat erratic recovery. So maybe a sound and sensible budget is best just now.

Comments (7)

by stuart munro on May 21, 2010
stuart munro

Do tell us when a sound and sensible  budget is not best.

But this one is predictably rancid. It is a budget for National's funders, not for New Zealand. And Goff has no credibility opposing it because he's been on easy street so long he's forgotten who he's supposed to be representing - oddly enough, not the nearsighted gnomes of Treasury.

New Zealand has underperformed for a generation, as Douglas's fiscal experiments facilitated the looting of the public sector.

We need a government that will rebuild - not fiddle with tax rates to favour their cronies. Solid and sensible pshaw.

by Alex Ballantyne on May 21, 2010
Alex Ballantyne

I second that pshaw.  Claiming to thwart tax cheats by borrowing to give them them millions is as solid as free goods to shoplifters or human sacrifices to sate murderers.  And will be as effective.

And a blatant transfer of wealth from poor to rich by a weaving tory administration on the cusp of multiple political disasters is hardly politically sensible.  On top of Tuhoegate, our charming gambler has played Brash and Richardson redux far too early: watch for those sleeping wild cards between now and next year.  How're those stockmarkets doing as we speak?

by Phil Sage on May 21, 2010
Phil Sage

Simplistic analysis.  National are fully aware that voters have preferred the warm, pampering and corrosive embrace of middle class welfare and statism for too mant years.  Key has promised to be moderate and he and English have played this budget process brilliantly.

There is work starting on privatisation to report next year prior to the election.

It is clear to me that this budget was as far as moderates could go in bringing change to the corrosive welfare and tax system put in place by Phil the Greek and co.  As John Key said National attempted to compensate low income earners for the rise in GST.  GST must rise further and direct tax reduce further to rebalance the incentive to save.  This is by no means the tax destination

Next year voters with money in their pockets from the tax cuts will be offered the choice of a government with clear and credible plans to build personal wealth in New Zealand against a clearly still floundering Labour.

As trust in National grows so will their support and so will the policies to bring genuine change to get New Zealand off the path to Greek bankruptcy and towards the upper half of the OECD.

 

by stuart munro on May 22, 2010
stuart munro

@ Phil, it won't happen.

NZ is trending downward, and will continue to do so. This allows bad employers to artificially depress wage growth, & these people are National's fan base.

NZ will not climb in the OECD until we have a manufacturing sector. Lack of financial regulation and a tax structure that encourages property speculation, together with a rigidly enforced hypo-inflation rate (that keeps the dollar unnaturally high) ensure that manufacturing will not recover.

The GST rise will suck money out of the lower and more active areas of the economy, and the service industries. This will further depress our already chronically depressed economy.

Any fool could make a better and more constructive budget than this, even the uninspiring Mr Goff. And any kind of economic expert who actually cared about New Zealand would be doing something completely different.

by Andrew R on May 23, 2010
Andrew R

From what I can work out anyone on less than about $80,000 will loose all of the "tax cut" to inflation in the next year if inflation is only 4%.  If it is greater the loosing out income increases.  And the borrowing between $400 million and $1.1 billion over the next 4 years to pay for the "tax cuts" i.e. to give to payout to the very wealthy comes at the costs of real cuts to education, health, no thought about the baby boomer superannuation and ....  It is as if the national/act/maori parties are treating the country as a large hanover finance company for their mates.

by mudfish on May 24, 2010
mudfish

Is that right that the tobacco tax will add more to inflation than the ETS? Is the ETS so weak? Are there still so many smokers? Here in Chch the air has been improving so much I thought we'd just about killed them off. Maybe I should get out of the office and see how big the bike sheds have become these days.

by David Beatson on May 24, 2010
David Beatson

Matt - those are the Treasury calculations - see page 65 of the Budget Economic and Fiscal Update.

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