John Armstrong: Everything in moderation

Michael Cullen says there is no money for tax cuts. Don Brash says there is.

To be more precise, the Finance Minister says there is no room for National to make substantial, across-the-board reductions in tax rates without slashing Government spending or spiralling up public debt - and risk raising interest rates into the bargain.

To be even more precise, National's leader says he has no intention of implementing sweeping tax cuts the moment he gets into office.

But he adds that Labour has exploited an excessive tax take to spend up large and scratch every conceivable political itch with money that should instead be left sitting in people's pockets.

As far as the politics go, it matters far less which politician is correct and much more which politician the public actually ends up believing.

However, it is Brash who must shift the focus of the debate and get voters asking one crucial question: if tax cuts amount to loose fiscal policy, why doesn't the same argument apply to Cullen's spend-ups?

Brash's speech yesterday on Auckland's North Shore - part of National's recovery plan following its slump in the polls - was the first step in dismantling shibboleths Cullen is raising to scaremonger against tax cuts.

Brash consequently concentrated on preparing the ground for tax cuts, rather than spelling out the exact detail of what National will do.

But no one could accuse him of having nothing new to say - he mooted tax rebates for those paying for their medical care or their children's education.

Labour will offer up their counter-attack on Tuesday when Cullen issues the Treasury's six-monthly update of the Government's accounts.

He will wield new forecasts of sliding Budget surpluses to back his argument that National has no room for tax cuts, despite Brash's pledge yesterday to put tax on the election-year agenda.

Cullen had already moved this week to head off Brash, by cautioning that the operating surplus - good as it might look at the moment - will fall back over the next three or four years as the economy begins to slow down.

He also warned of a double whammy on interest rates.

First, any blow-out in public debt from a loosening of fiscal policy would undermine the country's creditworthiness and increase the cost of borrowing.

Second, pumping more cash back into the economy could force the Reserve Bank to push interest rates up even further to contain inflation.

The upshot would be low- to middle-income earners with mortgages would be no better off from tax cuts.

And, inevitably, there would be more pain as National pared back spending on health services and education to pay for those cuts.

By painting such scenarios, Cullen is trying to box National into a corner where it would seem to be left with two equally unpalatable options: either press ahead with tax cuts that turn out to be unaffordable and thus carry a huge political cost; or, forgo tax cuts and thus deprive itself of a distinctive election plank.

But National is wise to Cullen's game.

That is partly why Brash's speech - much of it the work of finance spokesman John Key - steered away from offering much detail of the scope and scale of intended tax cuts.

National cannot afford to promise specifics now, only to see them derailed by pessimistic forecasts in next Tuesday's update and next May's Budget.

The message for the moment is that National will cut taxes - but moderately and over time. That leaves Cullen with less to punch at. He can only attack the idea when he would prefer to chew on the detail.

Given the polls, National is also acutely aware that sudden promises to chop rates by big amounts would look like desperation.

National wants to erase the inevitable suggestion that it is bribing voters, instead portraying its push for lower taxes as a matter of ideological principle.

The need to assert principle over pragmatism became even more pressing in the wake of necessary U-turns on the Cullen superannuation fund and four weeks' annual leave for workers.

However, National may have finally worked out that the mere mention of tax cuts does not necessarily have the electorate rushing to embrace you.

It first needs to persuade people that tax cuts are really necessary before outlining their form.

Brash is saying they are, because the burgeoning tax take is a recipe for fiscal indiscipline - as shown by the funding of hip-hop tours, for example.

Brash also argues that the high tax rates to which Labour seems philosophically wedded offer no incentive for people to work harder and thus fail to lift the country's overall economic performance.

In particular, he has rounded on Labour's Working for Families package as "middle-class welfare" which, due to the combined effect of the tax and benefit systems, will leave most working families receiving much the same net income regardless of how hard they actually work.

National firmly believes there is still little enthusiasm for this income-assistance package among middle-income families.

The phased introduction of Working for Families would enable National to tweak the package before it took full effect and offer tax cuts to those families instead, while leaving the elements covering low-income earners untouched.

National could also find the cash for tax cuts by reviewing Labour's spending priorities, particularly the whopping $13 billion in new spending earmarked over the next four years, which includes $3 billion for Working for Families.

There is no earthly reason why the major opposition party should be tied into following Cullen's future spending track.

But Brash is heeding one of the Finance Minister's warnings by saying the scale and initial focus of tax cuts will depend on the state of the economy at the time.

And - as a former Reserve Bank governor - he has no intention of triggering a rise in interest rates with too rapid a cut.

He is also saying significant reductions in the "tax burden" will take more than one term in government.

The upshot is National will go into the election campaign with the radical Brash promising much less than the moderate Bill English was proposing in 2002.

But, as Brash's advisers have no doubt been whispering in his ear, moderation is the mood of the times.