Editorial: Government must treat surplus with wisdom

A $7.4 billion surplus in the Government's accounts for the current financial year is a remarkable figure but not one that ought to be repeated. As a rule, Governments should not take more tax from the economy than they strictly need.

This surplus is the largest New Zealand has seen. It is the highest not only in the dollar amount but as a proportion of the total value of the economy - 5.6 per cent of GDP.

It is not the result the Government intended. It is a consequence of continuing strength in the economy generating $278 million more tax revenue than expected and reducing the demand for welfare benefits and other social services by $531 million. Investment income, too, is $548 million ahead of the forecast in December, thanks to improving economies overseas. By other measures of the state's financial position - gross debt, net debt - the picture is equally bright.

It is a happy prospect for Finance Minister Michael Cullen, who will present the next Budget in less than three weeks. He has long flagged an intention to loosen the purse strings this time, attending particularly to the welfare of low- and middle-income families, but there are already signs the fiscal looseness may be much wider.

For Auckland, the Government has lately found $50 million to keep Westhaven Marina in public ownership and last week it bought Kaikoura Island, off Great Barrier Island, for more than $10 million. Both of those purchases have been hailed as a means of saving assets from foreign ownership, but neither would have ranked as a necessity in any reasoned budgetary exercise.

It bears reminding ourselves that the money the Government takes for public purposes amounts to about a third of New Zealand's total economy. While the public sector contributes valuable output to the economy, it does so largely by taxing the earnings and spending of companies and individuals in the private sector. It must constantly ensure it is not taxing them unnecessarily, especially if they face higher rates than apply in other countries.

The corporate tax rate in New Zealand is now higher than that of Australia. The first call on a Budget surplus should be to bring that rate into line with our nearest competitor for investment and the larger component of what is now virtually a single transtasman market. There is even a case for lowering the corporate rate regardless of the fiscal position, since studies suggest one of the benefits of a lower rate would be to encourage overseas companies to retain more of their New Zealand earnings for investment in this country and overall tax revenue would rise.

When the Government is raking in $7.4 billion more than it needs it is time to look at tax reductions more generally. The promised relief in the coming Budget for low- and middle-income earners could, and should, take the form of income tax cuts, except that this Government seems to have a philosophical objection to them. It prefers to reimburse taxpayers through benefits and public service spending, which keeps state servants employed and wastes money on the way around.

Special assistance should be considered in this Budget for single-income families. Their plight has naturally worsened over a long period as double-income households became the norm and average living standards rose accordingly. Income-splitting, or some other means of acknowledging the unpaid work of parents who stay home, is long overdue. Again, it might not find philosophical favour with this Government.

Even with a record surplus, though, Dr Cullen will have to keep a weather eye on the economy. It has continued to run strongly and, even now, it defies fears of falling immigration, a slackening house market and a softening of domestic demand. But even big surpluses can disappear as unexpectedly as they sometimes arrive. Fiscal caution must not be thrown to the wind.