Colin James: Death-knell for reduction in taxes

COMMENT

If you didn't yet know, the Budget should drive it home - give up on tax relief.

Michael Cullen's message is to tap into the burgeoning business assistance programme, and lift productivity.

Cullen spent a whole page of his speech arguing that New Zealand's company tax was not out of line with OECD rates and was less burdensome than Australia's.

Yes, he said, company tax here was 11.3 per cent of total tax revenue compared with the OECD average of 9.4 per cent.

But at 3.8 per cent of GDP, it was only slightly above the OECD's 3.5 per cent.

In Australia, he said, company tax was 14.9 per cent of tax revenue and 4.5 per cent of GDP.

Moreover, Australia and much of the OECD had substantial payroll taxes and a general capital gains tax, which New Zealand didn't have..

So don't expect company tax cuts while he is Finance Minister unless OECD rates drop substantially.

Cullen also spent some time at his press conference comparing the effect on lower-income households of his direct assistance with the help they would get from income tax cuts, either in the rates or by raising the thresholds.

So don't expect income tax cuts either.

What he has done is redistribute past gains from rising tax takes. It is a huge redistribution to poorer households.

And he has drastically narrowed the options for future governments.

In his version of Sir Robert Muldoon's famous "I've spent the lot" before the 1972 election, he said bluntly that "there is very little room for any further substantial fiscal loosening".

There are two escape routes - but they are routes National is unlikely to rush to take up.

One is to can the $2 billion-plus going yearly into the super fund.

The other is to reverse his new commitment to get gross sovereign debt down to 20 per cent of GDP, not far below the 22.6 per cent projected for mid-2005.

Only two years ago Cullen set his gross debt target at 30 per cent.

By lowering his target he has limited his own scope for borrowing to pay for infrastructure and other capital projects - especially as his enormous social spending programme package, initially pushes gross debt up.

But National does have some room for rhetoric, which leader Don Brash used in his speech in Parliament yesterday to accuse Cullen of squandering the tax-cutting opportunity afforded by his accumulated surpluses to stimulate growth that way.

Brash noted that Cullen had stopped talking of getting New Zealand back into the top half of the OECD, which the Treasury says needs a 1 per cent lift in the 3 per cent trend growth rate projected in the Budget.

Cullen instead said that New Zealanders did not live by GDP growth alone.

"They rightly believe that success is defined as much by quality of life, a better environment and more effective health and education services as by narrowly defined economic performance," he said.

Those criteria just happen to be Labour's preoccupations.

What does business get? Assistance measures of variable quality and focus, increased research spending and measures to help firms lift productivity. Some business will get something out of that.

Next year, there will also be more spending power in the hands of 300,000 of the sort of households which spend most of what they get. That should counter the growth slowdown the Treasury expects to start this year.

Business will also benefit if the "working for families" package works, getting more beneficiaries work-capable and seeking work and, over time, easing the labour shortage.

And the Budget's 2007 boost for pre-school education might make it more likely more children get a better start in life and are more work-ready when they leave school next decade.

Moreover, the Budget is fiscally sound, assuming the projections are right. That is reassuring for investors. The Reserve Bank does not need to be trigger-happy with interest rates.

But the die is now cast. Labour is being Labour, redistributing income and, as Steve Maharey likes to put it, "opportunity" to the less well-off. Business pays.

* Email Colin James