KEY POINTS:
It sounds like economic jargon, but this week's Budget essentially boiled down to a one-sided battle between "fiscal impulse" and "fiscal creep" for Michael Cullen's soul.
The victor was never in doubt.
It is a telling feature of this Budget that the relatively unknown "fiscal impulse" - the
Treasury's best measure of the Government's effect on the economy - has shot to prominence.
It is perhaps the one indicator which most vividly gauges how the politics of the Budget will affect the economics of the Budget. Specifically, it shows the degree to which a big-spending, tax-cutting Minister of Finance would make life even more difficult for the Reserve Bank in controlling inflation.
With the economy revving wildly and starting to seriously overheat, the Budget's fiscal impulse would indicate whether Michael Cullen had been a boy racer and put his foot down even more on the accelerator, risking a further Reserve Bank increase in interest rates and a consequent rise in the New Zealand dollar's value.
The Budget was written with the express purpose of avoiding that. From its contractionary rise in fuel tax and a cash-absorbing savings scheme, the reader could be excused thinking the document was ghost-written by the Reserve Bank.
Even so, there must have been a sense of relief in the Beehive when the Budget's effect on the fiscal impulse was assessed as neutral. In other words, it was not going to intensify inflationary pressures. That is not the same as saying the Government's effect is neutral. The indicator already shows that is expansionary. The key thing is that Cullen had not made things any worse in the five months since December's half-yearly report on the Government's finances.
The last thing he wanted to do was hand National a Treasury-derived stick with which to beat him.
The party's finance spokesman, Bill English, has opened a front against Labour on economic management by seeking to blame interest rate rises on Cullen's proclivity for spending.
English will continue to do that. But it will be more difficult for him to make the charge stick.
Somewhat perversely, the fiscal straitjacket imposed on Cullen suited his purposes by providing him with the rationale for further expanding his KiwiSaver scheme to bring about a major turnaround in household savings rates.
The stars appeared to be in alignment. The expansion made fiscal sense in keeping the Reserve Bank sweet. It made economic sense in boosting the capital available for investment in new businesses. It made political sense in having the backing of Labour's support partners, most notably Winston Peters, whose long-term advocacy of compulsory savings makes him the real winner from the Budget.
This rare conjunction of circumstances may explain why Cullen was so chipper before the Budget, although it is difficult to see the trapdoor in the Budget through which English was supposed to fall according to Cullen beforehand.
If the trapdoor was KiwiSaver, National has reserved its position on the scheme, which Labour clearly hopes will have the additional benefit of limiting National's capacity to offer significant tax cuts. The cost of KiwiSaver is estimated at $700 million in 2008-09, rising to $1.2 billion the following year. It could go even higher if take-up exceeds current estimates.
National could face the dilemma of keeping the scheme and having less money for tax cuts, or winding up what might prove to be a popular scheme while being criticised for removing something which addresses a fundamental structural imbalance in the economy.
The other plus for Labour is that KiwiSaver's presence will enable Cullen to play to his strengths in next year's election campaign, rather than becoming bogged down in arguments about tax cuts.
As it is, National may have difficulty justifying tax cuts. If the economy slows and the Government's books start to show a cash deficit - as Cullen has forecast - affordability comes into question.
If the economy is still barreling along, the timing of tax cuts is still in question.
However, while the fiscal impulse is helping Labour's argument, "fiscal creep" - otherwise known as "bracket creep" or "fiscal drag" - is working ever-increasingly in National's favour by pulling more and more people into higher tax brackets as their wages or salaries increase.
About 14 per cent of taxpayers now pay the top 39c rate; when it was introduced in April 2000, the figure was less than 5 per cent. More than 30 per cent pay tax at the 33c mid-rate, against about 20 per cent when Labour came to power eight years ago.
The upshot is that more and more Labour voters are paying more and more tax.
Cullen may have given away the advantage of a captive Budget day audience by saying little about his longer-term tax cut intentions. He could have repositioned Labour at the head of the debate, instead of leaving it sniping from the rear.
Next year is election year and the political imperatives will continue to mount on Cullen to flag something in next year's Budget regarding long-term reductions in tax rates or an increase in the tax thresholds at which higher rates kick in.
But he is going to have credibility problems if he suddenly paints himself as the happy overseer of a tax reduction strategy.
Indeed, it may already be too late for Cullen to make such a transformation.
Instead, it is Labour's hope that the savings scheme will provoke a "change in conversation" on tax cuts by forcing people to assess whether they should join the scheme.
Once they see the potential personal gains down the track - along with the associated spin-offs for the economy - they may be less ardent about tax cuts. Or so Labour hopes.
But that requires Labour to get out and sell KiwiSaver - not an easy task because of the scheme's complexities and disadvantages.
The main downside is the cut in discretionary income resulting from feeding at least 4 per cent of wages into savings. It is here that National believes it can profit by highlighting the choice facing households buffeted by rising mortgage interest rates and rising prices.
What do they really want? An effective wage cut and no tax cut after nine years of Labour and none on the horizon? Or a meaningful tax cut under National?
