KEY POINTS:
Every year at about this point, the Treasury produces the Government's final accounts for the year to June 30, and every year since 2004 the economy has defied dire predictions. Once again, the economy has produced more tax than the Treasury expected, giving the Government an $8.7 billion operating surplus for 2006-07. This is lower than the $11.5 billion recorded in 2005-06, but considerably better than the picture painted in last year's Budget.
The Treasury says that when it wrote the budget for the year ended June 2007, it had not expected the longest growth period in 40 years to continue. But it did, despite the Reserve Bank's raising the official cash rate 75 basis points between March and June, despite petrol price rises, despite the high dollar hurting exports, despite a decline in net immigration and a slowing house market.
The economy seems to take these signs in its stride and people go right on spending, investing, working, earning and paying their taxes as though forecasts were for another planet. Even now, with the spate of finance company collapses and the financial turbulence flowing from the United States, grass roots activity in this country seems hardly to have wavered.
Through all these years of unexpected plenty in the Government's kitty, the Finance Minister has steadfastly resisted the logic of tax cuts. He resists still. Michael Cullen has greeted his latest surplus as a "surprise" and his immediate instinct, as always, is to put it away for a rainy day. It leaves the country in a good position, he said, to deal with future challenges such as the ageing population and any other unexpected shocks.
Well yes, but how long do we put away more insurance against a rainy day if the climate has changed? The country is running on low public debt, a strong currency, confident foreign investment and it is looking forward to very good dairy export prices over the next season or two.
Dr Cullen, to his credit, has started making sound provision against the public superannuation costs of an ageing population and has just launched a national employee savings scheme that has reported a higher-than-expected uptake in its first few months. What else can he do with our surplus tax in the name of insurance against financial shocks?
Any finance minister contemplating cutting taxes has to consider the state of the economy at the time. If the economy is running at near-peak capacity, with little more labour or resources to expand production, an injection of billions of dollars of extra household spending is likely only to raise the prices of the goods being produced. A round of inflation would start and, once started, it is hard to stop.
The Reserve Bank would probably take the pre-emptory step of raising interest rates. Thus, a tax cut at the wrong time would be an illusory benefit, likely to disappear in rising prices or higher mortgage payments. A Keynesian such as Dr Cullen holds that the right time for a tax cut is when the economy is flagging and needs the stimulus. An economy in that condition probably will not have produced a Budget surplus for a year or two. In that event, Dr Cullen says, he would readily budget for a deficit. He salts away surpluses in the good years to cushion the bad.
He surely has enough surplus revenue in his record now to balance a severe depression. It is time he loosened up. With the inflationary pressures of recent years ebbing, it is probably safe to start reducing taxation overall. He says the picture might be clearer in December and, if so, decisions might be taken as part of next year's Budget. He is stalling us yet again. Taxpayers are past hoping he will ever give back the money he does not need.
