KEY POINTS:
Michael Cullen's massive Budget surplus is indicative of political squirrelling rather than sound economic management.
The sight of the Finance Minister rubbing his hands in glee is disconcerting for anyone with an understanding of macro-economics.
A Government Budget surplus is usually regarded as a good thing in contrast to a Budget deficit. A deficit means the Government will have to borrow and eventually either raise taxes and/or reduce spending.
A Budget surplus indicates a Government is funding its expenditure from its revenue.
But the sheer size of this surplus represents an economic distortion largely due to over-taxation of the private sector.
A Budget surplus of about $8 billion equates to $4000 for every worker in the New Zealand economy.
The word economics is derived from the Greek term for household. The principles of economic management for a country share many similarities to the financial management of a household.
A key implication of Dr Cullen's Budget surplus can be illustrated using the analogy of a household.
In this household the wife (tax-paying public) is the primary income earner and the husband (Government) is a miserly hoarder.
The husband permits the wife a minimal amount for running the household each week.
Some weeks she is forced to borrow from the local loan shark just to make ends meet. The more she borrows the more interest she has to pay.
As she slides further into debt she de-velops a debtor mentality of living for the moment. She continues to borrow and spend.
Meanwhile her husband gleefully counts his hoardings acquired mainly from her income. He is reluctant to increase her allowance in case she becomes more extravagant in her spending.
The Government sector in New Zealand has a massive Budget surplus. But the private sector has an even bigger deficit.
New Zealanders are spending much more than they are earning. This is represented by our negative savings rates and our current-account deficit, which is one of the highest in the OECD as a percentage of national income.
Although this is largely the result of our hedonistic spending habits, it can also be attributed to over-taxation.
People's incomes are either spent, saved or taxed. If savings are negative this means spending or taxation or both are too high.
Dr Cullen has dismissed calls for tax cuts in recent years. He believes tax cuts would result in increased consumer spending causing greater inflationary pressures.
This would require the Reserve Bank to continue raising interest rates. While this argument may be valid, it is patronising and paternalistic.
For many people who would use a tax cut to repay debt, Dr Cullen is suggesting he knows how to spend their income better than they do.
His argument about the need for Government fiscal restraint to save us from ourselves does not seem to apply during election years. In 2005 the Government was able to use its tax mountain to trump the opposition with interest-free student loans and the introduction of its Working for Families package. Fiscal prudence applies only when it suits.
A cynical observer might suggest that the "borrow and spend" election strategies of Governments in the 1970s and 1980s have been replaced by an "over-tax and bribe" approach in recent years.
This has been forced on politicians by the Fiscal Responsibility Act and the greater transparency of public finances.
The borrow and spend policies were known as pump-priming the economy and were highly inflationary. This new approach could be termed hollow gift electioneering.
This Government came to power in 1999 trumpeting its pledge card. One of its key election policies was the introduction of the new tax bracket of 39c for those earning above $60,000. The additional funds that were to be raised from this new marginal tax bracket would be used to fund a high-quality health and education system.
Eight years later hospital waiting lists are still in the news. Terminology such as urgent and high priority is constantly redefined to ensure waiting lists are cut when it suits.
Our hospitals and schools are increasingly staffed by overseas recruits whose salary package at least includes a passport or permanent residency. Some of these recruits become disillusioned when they realise the true cost of living in the main centres.
Many salaries in these sectors have not kept pace with inflation, particularly rampant house prices. Some health and education professionals are now eligible for Working for Families assistance if they are not too proud to receive Government welfare.
There is something disturbing about middle-income-earners being reliant on Government assistance to be able to raise a family, particularly during a period of economic prosperity.
Dr Cullen need not be proud of his huge Budget surplus. It does not indicate prudent economic management. It represents economic distortion in the form of over-taxation.
It is also a contributing factor to the huge debt mountain the New Zealand public has accumulated over recent years.
* Peter Lyons teaches economics at St Peter's College in Epsom and has authored several economics texts
