Editorial: Landscape for tax cuts has altered

Two cheers for Labour's epiphany yesterday on tax cuts. Having denied so loudly for so long the possibility of giving more of people's tax money back to them to spend as they choose, the governing party has relented. While the very term tax cuts still sticks in its social democratic craw, Labour has extended "tax relief" through its Working for Families package to 60,000 more families, bringing to 350,000 families the number who will benefit.

Politically, this is a critical move for Labour. First, the lower-income voters who started to benefit from the original Working for Families offering in April were highly likely to be Labour-leaning. In effect, the package was simply making Labour more appealing to the converted. At election time, it needs more than its core vote. Second, the new Treasury figures released yesterday putting the projected Government surpluses at $7.2 billion by the end of this financial year, and totalling up to $29.1 billion by 2008/09, removed any public tolerance for tight-fistedness on tax. Third, of course, the National Party will unveil on Monday its long-awaited tax policy, which is expected to include an across-the-board cut to income tax and corporate tax.

Labour has decided to embrace some middle-to-higher income families with its relief measures before National can offer them possibly smaller amounts directly back into their pockets. The ideological divide is clear: Labour's move will, in effect, have the better-off paying relatively more to run the functions of state than they do at present. The progressive taxation curve begins to look steeper.

There are, however, risks for Labour in playing its extra, supposedly unexpected, $400 million a year in this manner. The critical factor in its relief strategy is the word "families". Yet there are some poor, many struggling, lower-income and a fair number of middle-income earners who do not have children, or at least children of dependent age, and who will not benefit at all. There are others, with children, but one too few perhaps to qualify for tax relief at Labour's thresholds. A family earning around $90,000 with three children benefits; one with two children does not. Mum, dad and four kids with a household income of up to $110,000 get something but their neighbours with three children can only look on.

This is the fact of such "targeted" tax measures. They exclude and divide as much as they "relieve" financial pressures on the cusp of income bands. Labour will have calculated the net electoral gain for itself to be sufficient to outweigh the risk of turning off some, childless or package-imperfect, voters.

Fiscally, National will gain in confidence from the extra Government revenue disclosed yesterday. The landscape has changed. No longer will the Government's refrain that tax cuts will break the bank, forcing cuts to health and education or intolerable debt, carry the same resonance. Politically, though, the party still needs to deliver for those in the ranks of the middle income, self-employed and caught by the 39 per cent tax rate who want everyone to benefit from the fortune being raked in by the state. The major risk for National is if the Treasury's forecasts, so consistently undercooked these past years, are unsustainably exaggerated in the face of a tightening economy and business outlook. The department was $600 million out just three months ago on the Government surplus. Can its forecasts now be relied upon to justify a truly bold across-the-board tax cut? Over to you, Dr Brash and Mr Key.