Colin James: Classic Labour, with prudence

Traditional Labour, within the constraints of prudent budgeting and with genuflections to a high-skills economy - that's Michael Cullen's fourth Budget.

And, in case you haven't got the message by now, he made two strong points at his press conference:

* On present projections he will have an extra $500 million or so to spend next year, and that is earmarked for tax credits for low-income families and assisting beneficiaries into work.

* Budgets are not the place to deal with the wishes of business for a better Resource Management Act and other such gripes. They are also not the place for corporate or upper-income tax cuts.

Cullen is not interested in thinly spread tax cuts, as Peter Costello has just provided in Australia (even if they do little more than keep the thresholds in line with inflation). Cullen is interested in "targeted" spending.

So what are Budgets for?

This Budget illustrates three points about Cullen the keeper of the exchequer:

First, he is determined to keep the Budget in surplus and to ride debt down. Under his central economic scenario, his surpluses rise yearly (after a small dip in 2003-04) to $6.2 billion in 2006-07 - and that is on relatively modest growth projections of 2.1 per cent, 3.5, 2.8 and 2.8 per cent in the years to June from 2003-04 to 2006-07.

And gross debt drops away. In his first term Cullen focused on keeping gross Government debt to about 30 per cent of GDP (as a way of setting a parameter on capital spending).

Now he has a bias towards reducing debt: "Given prudential management with a margin for risk, the bias is more against increasing debt than lowering it so that there will be a natural tendency for the gross debt percentage to trend downwards over time."

His projections show debt falling from 27.3 per cent this year to 23 per cent in 2007.

Debt won't get that low, of course - thanks to Cullen's second characteristic. That is a propensity to spend on social services and assistance. This Budget is redolent of that.

So health gets $711 million extra - $311 million more than the $400 million package announced last year, of which about $100 million is due to changing demographics.

Education receives $222 million in new initiatives, housing assistance gets $260 million over four years, and $500 million will go to low-income families next year.

That is a traditional Labour Government in action. The difference from the last traditional Labour Government, the profligate Kirk Cabinet of 30 years ago, is that the spending is within prudent financial parameters.

And that means some of the party's supporters, in the unions, the charities and voluntary sector, think it is miserly - the Greens' line yesterday.

National leader Bill English thinks so, too. He wants some of the surplus returned in tax cuts. Cullen's fiscal conservatism, English told Parliament yesterday, was costing taxpayers and business and causing "sclerosis in the arteries of the economy".

It is at the very least costing taxpayers more. Cullen refuses even to index the thresholds to stop bracket creep biting deeper into incomes as they rise.

According to official statistics, someone on average earnings is now $664 into the 33 per cent tax bracket. Quite apart from petrol, tobacco and alcohol tax rises, income tax is increasing yearly.

Bracket creep also adds to the gradually rising redistribution, which is at the heart of this Budget.

But there is a second constraint on the social redistribution: recognition of the need to get the growth rate up and keep it up to meet the Government's social ambitions.

Hence the third dimension to Cullen's Budget: targeted spending to boost "innovation".

Spending on research, science and technology rises 8 per cent this year ($140 million over four years), $110 million is allocated over four years to implement the four high-tech taskforces' ideas, there is a new $19 million spending fund and $12 million capital fund for commercialisation of research, and other bits and pieces.

Total spending on "innovation" initiatives in 2003-04: $76 million.

Note that number. It is not in the health, education and welfare league (though some education spending is skill-geared). If the Government wanted a steep change in economic performance as urgently as it wants a better society, it might exchange this gentlemanly trot for a gallop.

That would not involve capitulating to business demands for tax cuts and RMA changes and reversal of Labour's rebalancing of workplace laws.

The point is this: the Government believes it can boost growth with Jim Anderton's and Pete Hodgson's facilitative supply-side programmes, and eschews the alternative of tax and regulatory cuts to reduce business costs.

If Cullen is to prove that argument, he may need a heavier shoulder to the wheel than this Budget lends.

* Email Colin James

www.ColinJames.co.nz