John Armstrong: Battle of competing cuts

The money or the bag? Tax cuts pure and simple? Or tax cuts at too high a price?

Stung by the almost-universal scorn for the Budget, Labour is in ugly, but determined mood, its sole objective to crush the life out of National's tax cuts before they see the light of day, and in the process stifle what may be an incipient resurrection in Don Brash's flagging fortunes.

This week's Michael Cullen-driven offensive to retain the hearts and minds of the crucial swing voters in the mortgage-belt suburbs has been like some grotesque variant of It's In the Bag.

A fistful of dollars is being dangled in front of contestants. But in Cullen's version of the gameshow, if you take National's money, you also get the bag filled with the booby prizes of soaring mortgage interest rates and cuts to social services.

It has become something of a misnomer that, on tax at least, the choice at this election is clear. When politicians say that, they mean the choice they are offering is clear.

But for middle-income voters - who can expect to be the targets of a relentless barrage of competing messages - the choices are anything but clear.

Take the archetypal working family of four with a household income of just over $50,000.

Mum, Dad and their two kids currently just miss out on $40 a week in family assistance from the first stage of Labour's Working for Families package. They may be grumpy about that. But they will get nearly $50 a week next April when income thresholds rise to include them.

They may be getting help through the accommodation supplement. However, like thousands of others who are eligible, they may not know they are entitled, or not have bothered to apply.

They may feel they deserve a tax break. They probably believe Cullen has cried wolf too often in refusing one, given the scale of his surpluses.

Within a couple of weeks they should know how much Brash will give them - and, just as important, when.

But some of the shine has already been taken off the policy release by the gung-ho flagging of a tax cut by Christmas, when no change could be made before the start of the tax year next April.

That rash promise - for which no one in National is claiming responsibility - has been used by Labour to try to drive a wedge between Brash and his finance spokesman, John Key, as part of its campaign to undermine the credibility of National's tax cuts.

However, let's guess that National lops 3 cents off the 33c and 21c rates - reductions that would be in National's ballpark in terms of revenue it is willing to forgo. The family of four would get an extra $23 a week.

Labour will quickly remind them this is confirmation that families will always get more cash from its targeted assistance than across-the-board tax cuts.

National knows that - and its cuts may be correspondingly larger to try to compensate. But at what price?

The big question is going to be what reductions, if any, National makes to the Working for Families package, large chunks of which have still to kick in.

The answer is not much for those families on lower incomes, because they effectively do not pay tax that National can cut. They will keep the money. However, at the upper end of eligibility, it is going to be equally difficult politically for National to be seen taking money off families even though they may yet not be entitled to it.
Yet, if tax cuts do not result in some reductions in income top-ups under Working for Families, National risks charges of fiscal profligacy, as well as having to look elsewhere for savings.

One upside for National is that the uptake for assistance under Labour's programme, though officially on target, is hardly spectacular, given the massive advertising blitz.

Some 196,000 families are benefiting from Working for Families. However, only 14,000 of those are working families that were previously not getting assistance.

The slow uptake means Working for Families may not be quite the vote winner in middle New Zealand that Labour was hoping.

But neither is it a vote loser.

National will want the tax debate to focus on people deserving a tax cut. Instead, the party finds itself on the defensive over how it will pay for tax cuts, with Key having to give reassurances that job cuts in the public service will not affect frontline staff such as teachers and nurses.

National might see some advantage in having drawn Labour's fire before the details of its tax package are unveiled. At that point, people may concentrate more on what is in it and listen less to Labour rehashing its critique.

But Labour has some simple messages that will bear endless repeating to major portions of the electorate - those with mortgages and those who rely on state-provided social services.

Labour needs no reminder of last year's Australian election campaign, when the fear factor of rising interest rates was exploited by John Howard in clumsy, yet effective fashion.

However, the suggestion National might borrow to fund tax cuts may be more disturbing to voters on this side of the Tasman. National's willingness to be flexible about debt targets may be fiscally acceptable, but Labour will surely refresh memories of the rampant borrowing of the Muldoon years, particularly National's Think Big white elephants.

Tax may be the defining issue of this election. Cullen's job is to make sure it does not become the determining one.

However, something else was also driving his ferocious onslaught this week.

Ministerial mishaps across a range of portfolios this year were capped off by his failure to foresee the disaster-in-waiting of his 67c tax cut, sorry, tax adjustment.

That blunder could turn out to be the one that finally breaks the back of Labour's resilient poll rating.

Labour was already haunted by how things turned to custard in the 2002 election campaign.

Why - the party must be asking itself - is history repeating itself?

While the Prime Minister scoffs at suggestions Labour is losing its touch, this week was also about Labour convincing itself that it hasn't.