John Armstrong: Cullen's Budget days over

In a perfect world, Thursday's Budget would have been Michael Cullen's last. This Budget was archetypal Cullen - prudent, cautious and without surprises.

It would have been a fitting swansong for a finance minister whose greatest service to Labour has been to keep the party on the fiscal straight and narrow.

That has been the most vital of ingredients in the successful formula which has seen Labour twice being returned to the Government benches.

Cullen's stepping down would provide a timely watershed for Helen Clark's Administration, allowing it to take stock and enter a new phase.

It would be a clear sign that Labour is truly regenerating itself, rather than trying to look fresh by playing pass the parcel with portfolios up and down a never-changing front-bench.

It would allow Cullen's successor, most likely Trevor Mallard but possibly Phil Goff, time to attain authority and credibility as finance minister well before the next election.

National made the fatal mistake in 1999 of allowing personal loyalties to come before the party's best interest when Sir William Birch was allowed to present the pre-election Budget before he handed over to Bill English for the remaining six months or so to polling day.

That was nowhere near long enough. If Cullen was to step down at the 2008 election, then his successor would have to present that year's Budget. It would be even better if he were able to present next year's as well.

A new face might inject into that document what was missing from this year's - fresh ideas and excitement. There was no buzz around this Budget, yet Labour MPs now have to hit the road and sell it.

Their task is made somewhat easier by the usual dollops of cash distributed to education and social services, thus shoring up Labour's traditional constituencies.

Those MPs may also be quietly grateful Cullen appears to have put on hold his intention to confront the Budget's "black hole" - the bottomless pit which is health spending.

However, the most pressing reason for a new face in finance would be to lift Labour out of the trough into which it has been pitched by Cullen's negativity towards tax cuts.

The lesson from the last couple of weeks is painfully obvious - tax has dominated the discussion around the last two Budgets to Labour's huge disadvantage.

It is going to loom large before every Budget from now, shifting attention away from the things Labour wants to promote.

Given Cullen now seems more likely to stay than retire, he must somehow overcome his seeming reluctance to say anything positive about lowering taxes.

He would have made life easier for himself had the Budget speech highlighted that he would be addressing personal tax rates or income thresholds at some point before the 2008 election.

He has to do so anyway. A decision is pending on the indexation of thresholds - a hangover from last year's disastrous Budget.

He did not have to say much. But he instead dropped hints in subsequent interviews, indicating in piecemeal fashion that the review of business taxation - due to produce a discussion paper shortly - could include a cut in company tax which could require an accompanying adjustment in income tax rates.

So far, so muted.

Is the leopard starting to change his spots? Cullen insists he is not ideologically opposed to tax cuts.

The big question is whether he can display some real enthusiasm for them.

Tax cuts sell themselves. They do not require much of a sales pitch. But it helps.

It is inconceivable that Labour would go into the next election without a promise to lower tax rates or markedly raise thresholds at which higher rates kick in.

This week's exemption of Guinness Peat Group from changes to the international tax rules for the next five years shows the degree to which Labour is driven by political expedience, especially when the votes of some 28,000 New Zealand shareholders are at stake.

Likewise the Budget's road construction package, sold in the context of economic transformation, but which also trumps National.

It is Labour's instinct to do the same on tax.

But the more Cullen rails against large tax cuts, the more he reinforces a perception that he is against tax cuts generally.

He is banging his head against a brick wall.

Tax is fundamental. It is a litmus-test issue. National and Labour have markedly different stances; people have strong feelings about the desirability of tax cuts which makes them impervious to reason - as Cullen has discovered.

He can argue that his monster-sized surpluses are not really that big at all once payments into the superannuation fund and capital expenditure are taken into account.

He can argue this year's surplus has been bloated by one-off windfalls, such as the sale of Meridian Energy's Australian assets.

He can argue tax cuts are unaffordable by pointing to the cash deficits in the Government accounts over the next four years.

He can argue that large tax cuts would force the Reserve Bank to tighten the screws, sending interest rates soaring just as the economy goes into a downturn.

He can argue that large tax cuts would have curbed his ability to devote an extra $3 billion to the health sector over the next four years.

He can argue that the scale of National's tax cuts would force cuts in existing spending on health, education and other government services.

The latter warning worked during the last election campaign because it played on people's fears.

The other arguments have simply bounced off National, which is now seeking to capitalise on Labour's discomfort by resurrecting its billboard campaign, this time centred on why Australia is cutting taxes and New Zealand isn't.

There are questions about the wisdom of National's current tactics. The politics of envy only work when people can easily draw comparisons. The complications of Australia's tax system have no bearing on most New Zealanders' lives.

Moreover, there are risks in constantly saying that Australians are better off than New Zealanders.

Labour's riposte has been to tell Don Brash that if he thinks Australia is so good, why doesn't he go and live there.

However, painting National's leader as unpatriotic does not deal with Labour's fundamental difficulty - whether its finance minister can talk in convincing enough fashion for people to believe he really believes that cutting tax is not so bad after all.