Colin James: Tax cuts lure householders now used to big spending

What do you do when the house price boom runs out of puff, you're up to your eyeballs in debt and you want to keep up the life you've got used to? Pray - or vote - for a tax cut.

That is the hole once-happy consumers have dug for Michael Cullen for the election. And he stumbled into it on Budget day. Now, stomping the speech circuit, he is trying to recover the initiative with rational arguments that he has not been spending wildly and there isn't enough cash for tax cuts and a rainy day.

But rational argument is no cure for a hangover after a bout of irrational exuberance. Debt-fuelled spending powered Cullen's boom. House prices bubbled, people borrowed to buy houses at the higher prices - and to buy cars, fridges, clothes, meals out and the fripperies of modern affluence.

The Reserve Bank calculates average household debt is around 140 per cent of disposable (after-tax) income, up from 130 per cent a year ago and 60 per cent in 1990. Household debt went up 15 per cent in 2004.

No matter, apologists say: household assets have risen to match. The Reserve Bank says household net wealth - which is overwhelmingly in houses - is five times income, compared with 3 1/2 times four years ago.

So why not spend some of that windfall? Sing while the sun shines, just as grasshoppers do. But what do grasshoppers do come autumn? They hope for an Indian summer, a last reprise.

Spending habits can become ingrained. Extras become necessities; kids must keep up with mates; school fees at "free" state schools take a whack; you have to eat out more; the car really had to be upgraded. And now the mortgage is bigger and so are the interest payments.

Wage and salary rises are helping a bit. But the squeeze is still on.

Which is where that nice John Key's tax cut promises come in. A big tax cut by Christmas - oops, April - can keep the wolf from the door. And, since Scrooge Cullen has stashed away oodles of money - $7.5 billion - there is plenty there.

There must be, because Don Brash says so and he ran the Reserve Bank with a rod of iron (the fact that he ran inflation in the top half of his band escapes notice, as does his descent into Muldoonist populism at the hands of his minders). Brash even says he can have more police, more nurses and more teachers and more roads and more toys for the military and still give big tax cuts.

So if you are a grasshopper in need of an Indian summer, this National-style hip-hop is just what you want to hear. Even some unionists - usually Labour types - are saying it is time for tax cuts.

Cullen took a while to cotton on. He was convinced voters still preferred government spending to tax cuts, which they knew from the 1990s meant services cuts. Now he has to come from behind.

In a flurry of briefings and speeches he has been making these points:

* Core government spending has been falling as a percentage of the country's total output (GDP) - down 3 percentage points in six years. So, he says, he has not been profligate.

* Firing "pen-pushers" doesn't save much because there are not that many of them - and if you want more nurses, teachers and police, which his government has supplied (and paid better), you have to have support staff. "We need to maintain capability in those back office functions that keep them functioning on the front line."

* He doesn't have $7.5 billion spare. Almost all of that is committed to his super fund, roads and other infrastructure projects, student loans and investments. Spend any more or give away tax cuts and Key will have to borrow.

* Debt is a cost loaded on to future generations. He has cut debt from 35 per cent of GDP to 23 per cent. That means a much lower interest bill, which leaves more money for health, education, law and order and so on.

Great rational stuff for the boardroom. But not for grasshoppers in need of an Indian summer. They have been hearing ad nauseam about wasteful wananga, hip-hop tours and on and on. And as the long house-bubble summer has begun to cool, they have been listening to them. It is easy to believe that stern Brash and Key who doesn't cry can easily fund tax cuts.

Helen Clark told a sombre Labour caucus last week not to panic. The strategy ahead will consist of talking up Labour's positives (with a raft of new policy planned for the campaign) and attack politics to undermine National.

Expect to hear a litany of what will be "gone by lunchtime". Expect the "cuts" in National's Labour-tax/National-cuts billboard to be defined as cuts in services and in the Working for Families handouts.

If National wants it rough - and Brash has made it clear he does - Labour will play it rough as well as regal.

But Cullen might also usefully listen to the grasshoppers. A judicious change to his tax law to lift the tax thresholds next April instead of 2008 might be in order as the economic autumn sets in.

Somehow he needs to get the grasshoppers singing again. Till September would do.