Editorial: Repaying debt should take precedence over tax cuts

Mr Key seems to believe that middle New Zealand feels it is owed a reduced tax burden. File photo / Mark Mitchell

Key's election politics risk overruling fiscal prudence.

Six weeks ago, the Prime Minister was in no mood to offer encouragement to those who thought tax cuts might be in the offing. The Budget would have no plans for such a move, he told the North Harbour Club, while seeking also to dampen expectations of anything significant in the future. It was exactly the right thing to say. Now, however, John Key is singing a different tune. He is talking about tax cuts as a choice, and they are sufficiently in his mind to to have warranted a mention in last week's Budget.

It stated: "Operating allowances from Budget 2015 will be $1.5 billion a year, growing at 2 per cent for budgets thereafter. This is a moderate increase that will provide the Government with options around investment in public services and modest tax reductions." In effect, the growing economy is providing the Government with a bit more freedom. But this does not mean that, for the next term of government at least, they should be at the top of the priority list. Of far greater importance is the need to get debt back to under 20 per cent of gross domestic product. That, the Government says, will be achieved in 2019-20.

Responsible fiscal management argues for it reaching that target as soon as possible. At present, debt stands at 26 per cent of GDP, the product of $60 billion of new debt accumulated during six years of recession deficits. As such, the country remains vulnerable to economic shock. Five years provides a lot of time for events that could upset the most confident of forecasts.

Equally, the Government has said the 20 per cent mark is its trigger for resuming contributions to the NZ Superannuation Fund. It was begun by former Finance Minister Sir Michael Cullen for the purpose of putting budget surpluses into a fund that might help future taxpayers meet the cost of the baby boomers' retirement. In terms of demographics, a restart to contributions to the fund before the Government reaches its debt reduction target is easily justifiable. And in no way should tax cuts compromise the extent of that funding.

The Prime Minister continues to insist that cuts are an option. The statement in the Budget, however brief and however late in the piece it may have been added, confirms this is not the stuff of throwaway lines. Mr Key seems to believe that middle New Zealand feels it is owed a reduced tax burden. That group "pays a fair bit of tax and often doesn't get a lot in return", he says.

Mr Key is thinking purely in political terms. The carrot has been dangled and could be presented to voters during this year's election campaign if the National Party falters. Tax cuts, as much as they would be fiscally unsound, might come to be seen as politically necessary. Yet for once, the Prime Minister's instinct is almost certainly misplaced. There is little to indicate that most people feel they are owed tax cuts. New Zealanders are aware that, while the country has emerged from the global recession in relatively good shape, there are more important priorities.

In any event, the Budget contained some rewards for the families in Mr Key's middle New Zealand. The two most obvious were the provision of free GP visits and prescriptions for all children under 13, and extended paid parental leave. This stole much of the Labour Party's thunder. The talk of tax cuts presents it with a justified avenue of attack, not least because during its last term in power, it resisted such a temptation while emphasising the need to prepare for a rainy day. In the interests of the country, Mr Key must show the same responsibility.