KEY POINTS:
When an initiative is an inordinate time in the making, there is usually a muted reception. Two cheers, then, for the Labour Party's long-awaited tax cuts, which take effect today. At very nearly the conclusion of three terms in government and after nine consecutive years of growth, the Minister of Finance is giving workers between $12 and $28 more a week in their pay packets as the first round of personal tax cuts. The step is as welcome as it is belated.
The introduction was, of course, timed from the start to occur just before the general election. But with the current economic turmoil, it makes more sense now than it would have in more buoyant times or even when announced in this year's Budget. A flagging economy needs the stimulus of more spending money in people's pockets, even if the sums on offer are modest.
But the economic environment also creates doubt about the extent of the tax cuts. Just as the reductions begin, Michael Cullen has admitted that he is uneasy about the debt level sparked by economic weakness and other factors, such as a higher than expected take-up of KiwiSaver. The pre-election fiscal update, to be released next Monday, will, he says, show a substantial deterioration in the Government's position, and that his target measure for debt of 20 per cent of gross domestic product has been breached.
So much so that after years of bringing debt down, to as low as 17 per cent, Dr Cullen says he is "beyond his comfort zone". Indeed, Labour may yet have to borrow to fund its tax-cut programme. If so, much of the blame can be apportioned to the generosity of some of its policies, such as those on student loans and free early childhood education.
Tax cuts, not credits, should have been accorded a far higher priority, given the public's understandable irritation with bountiful operating surpluses and Labour's reluctance to acknowledge that the state should take no more of people's earnings than it reasonably needed.
Attention will turn now to the National Party's tax-cut policy, which could be announced as early as next week. It has reaffirmed that its cuts will be around expectations, of about $50.
The National leader, John Key, says a deteriorating economic scenario has been factored into its policies. It seems unlikely, however, that this arithmetic can have encompassed the darkest of the potential clouds from the United States' financial crisis.
Only the foolish would pretend the current turmoil is not happening and carry on regardless. Yet that might be a temptation for National. For a long time, tax cuts have loomed as the defining issue of the election. The spotlight will, therefore, be on how it plans to fund its more generous programme. So far, it has indicated only that the reductions will come from "two quite specific areas", but has refused to specify these.
More detail is essential. If, in addition to savings in public spending, National plans to borrow for tax cuts after all, it must say so. Dr Cullen has been wise to maintain public debt at around his target level. Sacrificing the balancing of the Budget in the interests of overly generous tax cuts would make no sense. National's policy must be a cogent part of an overall economic strategy.
Almost Labour's first act after taking power in 1999 was to raise the top rate of personal tax. This was done for no other reason than to restore the tax scale's former bite on high earners. Five years on, a farcical "chewing gum" tax reduction was proposed and then abandoned.
Nine years on, a move in the opposite direction has finally been made. It should be greeted warmly. If it is viewed widely as overdue and underwhelming, Labour has only itself to blame.
