O'Sullivan: Cullen faces tax tightrope

By FRAN O'SULLIVAN

Finance Minister Michael Cullen has a first-class opportunity to put his stake in the ground with Thursday's Budget by signalling a cut in the company tax rate.

Cullen's own "Good. But not good enough" verdict on the Government's financial performance will be reversed if he shows he is prepared to act in response to today's message from Auckland business.

But Cullen risks losing business support if he sits back for another month and waits for the McLeod taxation committee to spell out its options.

The McLeod committee's review of New Zealand's tax system will examine the dynamic effects of lowering company taxes: this is code for calculating whether Government income lost through cutting company tax would be compensated by additional windfall gains achieved through the stimulation of the overall economy.

It's one of those "pig in the poke" affairs, which despite Cullen's real concerns about the risk of a return to structural Budget deficits, will in this case come down to whether those making the fiscal decisions see the glass as half-empty or half-full.

Cullen may duck the company tax on Thursday, but it is already shaping up as a defining issue for next year's election.

National is developing a line that Cullen's giant Superannuation Fund will act as a weight on the economy. A thirsty beast that must be fed through increased revenue streams, thus cutting off future options to lower taxes. The longer Cullen equivocates, the more support will flow to National, particularly if it starts to ramp up fears of more hikes in the top personal income tax rate.

The Super Fund will constrain policy options for Labour as much as its competitors and will increase pressure on Cullen to widen his revenue net next year, to fund spending initiatives to keep his party's voting base onside.

A range of stealth taxes: increased excise duty on alcohol and petrol, to name just a couple, have been already floated by various cabinet ministers as the Government seeks to widen the taxation net.

Cullen will invite criticism that he is a "tax and spend" minister if he raises such taxes on Thursday when he has already let his grip loosen by allowing his self-imposed spending cap to blow out by $270 million to accommodate unforeseen spending on defence and biosecurity.

Already the Government has shown its colours in the retrospective grab for GST payments and indications that health taxes are on the way.

All Treasurers dress up the bottom line one way or another. They are no different to most company CEOs.

Because economic growth is expected to trend below the three per cent average on which Cullen has predicated his long-term forecasts, he will need to explore other revenue-generating options.

Economic Development Minister Jim Anderton's team has proposed sucking back more than $500 million from over-capitalised state-owned enterprises. But any such revenue windfall will be offset by increased capital spending for NZ Post's People's Bank, a buyback of national rail capacity and the reduction of dividends through the removal of Television New Zealand's commercial focus.

Tomorrow, Australian Treasurer Peter Costello will unveil a $A5 billion ($6.2 billion) fillip to the business sector by cutting company tax from 33c to 30c and abolishing a duty on financial institutions.

Costello has promoted his Budget as "dramatically cutting taxes" within a balanced budget.

Prime Minister John Howard has added a fiscal stimulus of his own with cuts in fuel and beer taxes, new spending on roads and reforms to tax reporting. But the Liberal-National coalition still faces defeat at this year's expected election unless it can use its Budget to lay out a programme that addresses Australia's structural issues.

Cullen does not face the electoral imperative this year.

He will use his second Budget to signal the Government's spending priorities rather than flesh out a grand plan to transform the New Zealand economy.

The expected policy initiatives affecting business include: tertiary education reform to remove expensive duplication of resources and direct students towards science, engineering and other hard-edged areas which are critical to New Zealand's economic resurgence, more focus on research and development, the launch of a capital seed fund for venture capital initiatives, more start-up initiatives and a focus on international trade agreements.

But the major roading programme which Auckland business is crying out for has not yet been through all the policy hoops.

Transport Minister Mark Gosche has a range of options in front of a cabinet committee to fund the $1 billion plus transport platform for New Zealand's business capital.

These include: raising fuel taxes, increasing road user charges, using a mixture of public and private equity participation for ameliorating the upfront cost of new roading investment and toll roads.

Any budgetary implications of the transport package will probably be accommodated within the Budget's fiscal contingencies. Some of the initiatives which underpin cabinet minister Pete Hodgson's Knowledge Economy thrust will be contained in the Budget - others will be outlined at the Knowledge Wave conference.

A spate of weekend news stories illustrates the absurdity of New Zealand's taxation situation.

Increased excise duties on alcohol and bovine flatulence have been floated - the latter denied last night.

But taxation is not necessarily the answer to what is in some cases a behavioural issue.

Acting Health Minister Tariana Turia claims alcohol misuse is costing New Zealand $1.5 billion to $2.4 billion a year, and wants to increase excise taxes on alcoholic beverages to cut down teen usage.

If alcohol consumption was spiralling out of control, the Government would already be deriving benefits from a pro rata increase in excise duty. Government tax figures in fact show excise duty for alcohol tracking in line with last year's rate. Raising the drinking age and banning alcoholic pop-type beverages would probably achieve Turia's aims without penalising other consumers.

Anderton's economic aide, John Lepper, has calculated that at June last year, approximately $730 million of equity was available to be released from the SOEs to put into new investments such as the People's Bank.

Lepper said extracting the $730 million excess equity would reduce the Government's operating revenue by $100 million through reduced dividends and tax payments.

He pointed to at least two windfall capital transfers to the Crown: a one-off transfer through the modernisation of the Public Trust and $55 million through the liquidation of @Work.

A joint Government/community consortium to invest in infrastructure projects such as rail, local airports and sewerage has also been mooted.

The revenue streams from the $4 billion assets tied up in community trusts and energy trusts could be put towards regional projects or economic development projects, the Alliance adviser suggests.

Cullen's own preference has been for investment proposals to be examined on their merits with any equity contribution coming from the Government's consolidated fund.

On Thursday, we will know whether fiscal purity has been maintained.