Rodney Hide: Tax skims millions more than needed

Rodney Hide

Opinion

With the Government running $7 billion surpluses, the call for tax cuts is naturally getting louder. Finance Minister Michael Cullen, keen to shut down such calls, has two options: offer across-the-board tax cuts or devise a cunning plan so the surplus no longer exists.

Not being able to bring himself to deliver tax cuts, Dr Cullen is set to proclaim in May that he has no money.

In this year's Budget, Dr Cullen will showcase a new measure of Government sector cashflow, designed to get us thinking that the accounts are so squeezed there's no room for even the tiniest tax cut.

After two decades of reform, the Government's pot of money is bubbling over. Twenty-one per cent of workers now pay the top personal income tax; more people are paying tax; we have higher company tax because of extra profits, and a higher GST and excise tax as the country has had a good spend-up. And that's before we count the more than 30 new or increased taxes, levies and charges under Labour, or the extra traffic-ticket income.

The problem is that despite the Government running big surpluses, households are no better off in real terms after tax. Dr Cullen himself confirmed this in Parliament late last year when I quizzed him on the relative position of the average household five years ago and now. Under Labour, he cheerfully responded that growth in household income after taxes had been 10.1 per cent, the same as the rate of inflation.

In other words, the pie has got bigger but it's not hard-working New Zealanders who are enjoying it. Rather, it's the greedy Labour Government. Instead of changing the way the Government does its accounting, Dr Cullen should just front up and admit that his Government has been creaming off billions more than needed.

But, strangely, the Labour Party is ideologically opposed to cutting workers' taxes - that would amount to an admission that tax cuts are fair and would boost growth.

So the large surpluses are a big and growing embarrassment for Labour - an embarrassment of riches. Labour has tried to spend it, but just throwing money at things doesn't necessarily generate better outcomes (just look at the wananga). The fact is that you just can't spend $7 billion on new operating expenses. The public sector is simply not geared up for it.

So Dr Cullen has settled on a magic trick to make the surplus disappear, or almost disappear. And in a stroke of genius the history lecturer has reinvented himself as the country's pre-eminent accounting expert.

To him, decades of accrual accounting and public sector financial reform were all misguided. The generally accepted accounting practice edicts, while legally required, are apparently misguiding in that they give people the wrong impression of the amount of money the Government has to play with.

Much easier to go back to cash, says Dr Cullen. That way he can deduct from the operating surplus all the capital items, all the student loans advanced, all the super fund contributions and spending on construction of new hospitals, schools, prisons and police stations.

This way, a $7 billion surplus can easily be transformed into a $1 billion surplus or even a deficit. Magic. Wonderful. Try to get a tax cut out of that.

So Dr Cullen's bright idea will be dutifully trotted out in the Budget and centre-staged. Public servants will nod politely in their approval of the emperor's new clothes, for these days none dares disagree. And the new cash standard for reporting surpluses or deficits will pass into common usage.

But let's look behind the puffery and spin which will no doubt accompany the new reporting statistic.

We should not forget that it was Dr Cullen himself who adopted the Oberac (operating balance excluding revaluations and accounting changes) measure in 2001, stating then that this measure would provide a much better picture of the overall health of the Crown accounts. It has now become an embarrassment and so now he wants to change the rules.

In reality, operating surpluses are the universally accepted measure of the health of an organisation's finances. They compare the year's revenue with the year's expenses. The gap - in this case the surplus - is the margin by which the year's revenues were above that required to fund the organisation's expenses. In business that is a profit. That is what drives the share price. In Government it represents overtaxtion.

Capital expenses are lumpier by nature and vary from year to year. The operating statements already make allowances for capital spending in a number of ways.

First, depreciation provides a matching of a portion of the capital cost against each year of the asset's useful life.

Second, the Government in some instances imposes a capital charge. Such a charge is imposed on health boards and shows up in the operating costs under the Budget vote for health.

Third, when the Government borrows to fund things, the finance costs are included in the operating statements.

So the operating statements are designed to present a fair view of the state of the Government's accounts, and take account of capital spending.

If you overlay capital spending on top of this, the inevitable result is to present a misleading view as to the state of the Crown's finances.

Nevertheless, Dr Cullen - indeed, the whole Labour Administration - is just arrogant enough to give it a go. They know that criticism from the public service will be muted or non-existent. They expect the media and commentators will simply swallow what they give them. And anyone who does have the temerity to point out that the emperor is actually standing proudly in his undies will get the usual rebuff and be ostracised.

Basically, Dr Cullen is talking absolute garbage. If what he's saying is going to be the new way, then perhaps New Zealand businesses should be allowed to account the same way. This would see business enjoying 100 per cent tax deductions for capital purchases instead of depreciation allowances. Some might even pay no tax at all if profits are reinvested in the business.

Dr Cullen would have no time for such self-serving smoke and mirrors so why should we accept his new logic? His changes should be seen for what they are: he is not an accounting genius, he is an illusionist.

* Rodney Hide is leader of the Act Party.