Scoop Election 08: edited by Gordon Campbell

Cullen’s Cannily Constructed Budget

May 22nd, 2008

Words Gordon Campbell – Images Kevin List
Finance Minister Michael Cullen
In better times, this cannily structured Budget would have been a circuit breaker for Labour – but given the current levels of public disenchantment with the Government. Finance Minister Michael Cullen’s ninth budget will probably be greeted grudgingly by the public, as a plea bargain at best. Some of this Budget’s strongest benefits for Labour will come later on the campaign trail, during the toe to toe contrasts with what National will have by then, needed to put on the table.Certainly, Cullen has made the best of a difficult hand. Against a gloomy backdrop of the slowdown in the domestic economy and rising global fuel and food prices, he has found the room to deliver – with a little something for everyone and substantial gains where it matters. Namely, tax cuts of $43 a week for average income families from October 1, rising to $85 a week from April 2011. To put this another way : the Budget cuts taxes by a quarter of current levels for those on the full time minimum wage, by one sixth for those on the fulltime average wage, and by one eighth for those earning over $80,000.

By altering the tax thresholds, Cullen has not only delivered relief in proportion to where it is most needed, but given an inducement for voters to come back for more. Both the method and the outcome are in stark contrast to National’s approach of ‘across the board’ cuts in tax rates approach that John Key has continued to tout this year – and which would have given $12 a week relief to the poor, and $92 a week to the better off. Cullen has in fact, trumped Key by delivering something very close to the “north of $50′ relief to a fair chunk of the electorate.

The Budget is pored over in the lock-up
One political outcome is that by altering the impact of the lower tax thresholds, Cullen has delivered relief to those people living on retirement investment income. Labour can choose either to use this pre-election to make inroads into Winston Peters’ core constituency, or to make a case for co-operation with the NZF leader, post election.Fine. There will be a lot of noise about this being the first cash deficit Budget for yonks, and about Cullen’s prior criticism that National would have had to borrow for tax cuts – and now look, Labour is doing the same. To which one could reply that the scale is vastly different – what Key was talking about would cost about $5 billion a year. For half that annual cost, Labour can argue that a much bigger chunk of its package is earmarked for virtuous capital investment – it unveiled in this Budget for instance, a far saner, much more competitive solution on telecommunications than National’s mooted $1.5 billion spend-up on broadband. Also, debt levels as a ratio to GDP( p 96) remain very healthy, so the debt criticism doesn’t really hold much water.

The more substantial criticism is about the consequences of this $10.6 billion tax package ( over the four year forecast period) for (a) inflation and (b) interest rates? Truly, there are some very heroic assumptions made about CPI forecasts – a brief surge to 3% in 2010, but otherwise would you believe, the CPI index rises are picked to stay at 2.6 % for the foreseeable. If you believe that, I have a bridge in Brooklyn going cheap up on Trade Me. Similar very willful optimism is evident about forecasts for labour productivity growth and unemployment ( page 60).

Overall, these are minor crimes. Given the slowdown in the economy, Cullen is gambling that Reserve Bank governor Allan Bollard will treat this level of phased in tax cuts as a gradual and sustainable stimulus to economic activity . Obviously, the political gamble involved in this trade-off is crucial : in poll after poll, voters have insisted they don’t want tax cuts if that results in hikes to prices and to mortgage interest rates.

Are there fish hooks in the economic data ? You bet. If National does win the election there is a nasty surprise flagged (p 39( near the end of Cullen’s speech. The out-year spending allowance has been lowered to $1.75 billion from Budget 2009, and as Cullen says ” this will be a hard target to meet, requiring re-prioritisation efforts.” You bet. In other words, if Cullen is being Santa Claus in 2008, he plans on reverting to skinflint Scrooge next year if re-elected – and if he isn’t re-elected, Key is probably going to have to cut public services to pay for this year’s largesse. By how much ? Well, that’s flagged on page 155 to the tune of half a billion dollars in each successive year to 2012. Very neat. National has been set up to be a one term government.

At the other end of the income scale, the tax advantages to those on low and middle incomes has occurred in a climate of ongoing neglect of beneficiaries. Sure the tax threshold changes will help some of them – but this doesn’t justify the reductions in some key beneficiary areas. The amounts allocated for sickness benefits, widows benefits, unemployment benefits,  and most outrageously special circumstances assistance  have all been reduced.

Given that money has somehow been found in this Budget for a brand new $27 million fund over several years to help New Zealand’s local film-makers, this kind of tight-fistedness being shown to the most needy is shameful for a Labour government.

Over the next few days, Scoop will be going through detail of the major areas – health, education, infrastructure spending etc . For now, Cullen can be satisfied with what he has accomplished here. Fighting out of a corner and written off as an election liability, Cullen will never bee the electorate’s pin-up buy – but in this Budget, he has given the Government some choice pieces of ammunition for the battles that lie ahead.


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    1. 13 Responses to “Cullen’s Cannily Constructed Budget”

    2. By Susan Kishner on May 22, 2008 | Reply

      Nice writing style. I will come back to read more posts from you.

      Susan Kishner

    3. By ak on May 22, 2008 | Reply

      Thank you Gordon. Still head and shoulders above any other political writer in any medium.

      Just a word on the treatment of beneficiaries though: while not wishing to laud Labour in this area, perhaps the reduced payment amounts reflect the shrinking numbers of beneficiaries.

      And absolute levels of main benefits are not always so crucial: what matters is the awareness and availability of the myriad forms of supplementary assistance.
      In my own experience the difference in departmental “culture” in this regard has improved out of sight under Labour. Most beneficiary advocates I know are no fans of Labour – but they absolutely dread a return to the dark days under the tories.

    4. By David James on May 22, 2008 | Reply

      Yes, but how much cheese is being offered?

    5. By Jack on May 22, 2008 | Reply

      I think Michael Cullen’s budget lacked true leadership. Remember, the productivity of New Zealand has dropped considerably. This isn’t going to improve it that much. It would have been more effective if the whole tax structured were changed. Dropping the rate down by 5 to 10 percent e.g. 33 percent down to 25 percent, etc. Since Labour has been in, the price tag of the government has gone up by 20 billion annually yet the quality of services has either stayed the same or dropped. Look at medical. I rather see the money go to the doctors and nurses than to hire middle management who really do not offer better medical assistance. This has been Labour’s big problem and I think National is going to challenge it.

    6. By gong on May 23, 2008 | Reply

      alot of the medical is due to DHB’s, which i believe were nationals doing

    7. By Thomas on May 23, 2008 | Reply

      why Do the media keep portraying Labour as dog tucker, when even and inspite ogf this, todays Morgan poll has A LGMP coalition within striking distance of forming the next Government?

    8. By Virgil Tracey on May 23, 2008 | Reply

      Leaving aside the costs, the benefits and spin – isn’t this another example of Labour not listening?

    9. By Bronwen on May 23, 2008 | Reply

      Barely a litre container of milk for the poorest in our society, those on benefits and on very low incomes, the budget is pathetic, sadly these people continue to vote Labour despite being continually marginalised,isn’t it supposed to be a sign of good government if the most vulnerable in our society our looked after. Was horrified to hear a ‘successful’ wealthy businessmen say he was disappointed at the tax cuts for those on good incomes….. As an earner of $50,000 I would prefer to be taxed more heavily on order to see the poorest looked after more responsibly and health and education getting a higher share of taxes. Thanks Gordon as ak said streets ahead of most journalists.

    10. By richarquis on May 24, 2008 | Reply

      @Thomas – If i understand correctly, (and if i dont, i’m sure there will be no shortage of people telling me so) the nz media, by and large owned by fairfax media, publish primarily the results from (you guessed it) fairfax media polls. basically, as long as they continue to print just their own polls, or occasional outside polls that concur with their own, in order to give a semblance of impartiality, then the majority of the reading/ watching public are going to be force fed on those selective data. those who choose to get their info from a variety of sources will always see things differently, and will be so much the better off for it. to see what lack of independent media can do to a country’s zeitgeist, just look at what’s been happening to russian media over the last few years. even the staunchest opponents, novaya gazeta, have been brought to their knees. our situation, granted, is peaceful, and we dont suffer for our opinions as some there do, but we can still learn from it.

    11. By Margaret Swift on May 24, 2008 | Reply

      I do think that David James should be careful how much cheese he wants, it can make you terribly constipated. In fact going without cheese is probably far healthier for us all, an so why dont we just let it all be exported so it can earn us lots of profits coming back to our Farmers.

    12. By Margaret Swift on May 24, 2008 | Reply

      Labour has been changing the rules for medical expendature. Im sure I heard on National Radio that the government now has Doctors on the panels who decide where the money goes and how many operation are being done and in which area of need, so we can expect to see improvements flowing through soon enough.

    13. By Margaret Swift on May 24, 2008 | Reply

      In reply to Virgil, who does he think the government is not listening to?

    14. By Carey Burr on May 27, 2008 | Reply

      Tax cuts are all very well, but wouldn’t it be more productive to replace the current tax on petrol with a flat rate, increase spending in the health and education areas, so everyone benefits from it without anyone feeling like they’re not getting their ‘fair share’.

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