KEY POINTS:
Michael Cullen's confirmation of tax cuts phased in over three years was hardly going to be greeted by an outpouring of criticism. Nor, however, was it likely to attract much applause. The Finance Minister was, after all, merely consenting to what many New Zealanders, commentators and this newspaper have urged for years. All have tired of the Government's bountiful operating surpluses and its dogged refusal to acknowledge that the state has no right to take more of people's earnings than it reasonably needs. If Dr Cullen wanted conclusive evidence of this sentiment, he need only have scanned last month's Herald-DigiPoll survey, which showed tax cuts were foremost in the minds of both National and Labour supporters.
If this concern has galvanised Dr Cullen, he is not about to show it. John Key characterised the announcement of Labour's tax cut programme as something done "begrudgingly". That seemed on the mark, even if the National Party leader's view that Dr Cullen was looking for any excuse to abandon the programme was fanciful. In fact, National's credibility on this topic, even if fiscal responsibility may stay its hand to a degree, means the Government has no option. This, it knows, will be perhaps the defining election issue.
That did not stop Dr Cullen mounting a token resistance by stipulating four tests before the programmes could begin. These say there should be no borrowing for tax cuts, no reductions in services, no impact on inflationary pressures, and no prospect of the cuts promoting greater inequality in society. Of these, only the possibility of inflationary pressures holds water.
The state of the economy must be considered when taxes are cut. The best scenario for such action lies in providing a boost during a slowdown. If the economy is running close to capacity, cuts could prompt a round of inflation. In that case, the Reserve Bank would raise interest rates, and the benefit of the cut would vanish in a cloud of higher prices and mortgage payments. These are matters to be mulled by Dr Cullen in the run-up to the May Budget, although, in reality, his Keynesian instincts must bow to the exigencies of political survival. The real question will be the size and scope of the cuts programme.
None of the other tests need concern him unduly. Lower levels of Government debt have been an ongoing concern for Dr Cullen, with his desire to reduce the need to react sharply to economic shocks sometimes being carried to the point of excessive zeal. At this point, borrowing, whether for infrastructure development or tax cuts, can hardly be considered imprudent given the record surpluses year after year. Likewise, Dr Cullen's determination not to cut services smacks of extremes. The likes of health and education spending may be sacrosanct but there are other areas that could be trimmed.
The final test - that cuts must not lead to greater inequality - is purely subjective. Low-income families have fared well under the Government's Working for Families programme. The same cannot be said for the middle-class. Many have found themselves in the ranks of "the rich" thanks to the non-adjustment of the $60,000 income threshold for the top 39c tax rate. Twelve per cent of earners now fall in this bracket. To capture only the top 5 per cent, as originally intended, the Government would need to raise the threshold much closer to $80,000.
These are matters of equality that Dr Cullen must decide upon closer to the Budget. He talks of spreading the cuts "quite broadly". If he does not allocate them fairly, especially to those who feel disadvantaged, the Government will gain little. That is a price apt to be paid when a policy is too long in the making.