Labour's plan funded by business taxpayers

Michael Cullen

Three questions need to be asked of politicians promising tax relief: Where is the extra money coming from? Will it keep coming? And will it push up mortgage rates?

In the case of Labour's plan, announced yesterday, to boost the after-tax incomes of most families with children, the answers are that the extra cash is coming mainly from business taxpayers, that it probably won't keep coming indefinitely and that the changes should not spook the Reserve Bank into raising interest rates.

The updated Treasury forecasts of the Government's financial outlook have $2.3 billion more tax revenue coming in over the next four years than the same forecasters expected only three months ago.

About half of that extra money is company tax, and if you throw in the self-employed more than two-thirds of it is broadly from business taxpayers.

The problem is that growth is slowing.

Three-quarters of the extra tax forecast to roll in over the next four years comes this year and next year.

The company tax take swings round a lot and is more sensitive than personal income tax or GST to how well the economy is doing.

So some of the extra tax revenue to fund the family tax package may turn out to be cyclical froth rather than structural beer.

Budget forecasting is hardly an exact science. Past experience suggests the Treasury's picks of economic growth two years ahead are out by an average 1.6 per cent.

So when they say growth will be 2.6 per cent, we can be pretty sure it will be something between 1 per cent and 4.2 per cent.

It makes a big difference: 1 per cent more or less growth adds or subtracts about $500 million to the budget surplus in the first year, $1 billion in the second year and so on.

So the extra cash to fund the ongoing cost of yesterday's family tax policy, around $400 million a year, is all in the margin of error. Now you see it, now you don't.

Michael Cullen says his Budget last May was already "treading a fine line" in terms of pushing more cash into an economy in which inflation is already close to the top of the Reserve Bank's permitted range.

So is the Government pushing its luck, in terms of triggering interest rate rises?

It seems not. The increases in family after-tax incomes are timed to kick in mainly in the 2006/07 year, the trough of the economic cycle.