KEY POINTS:
Reserve Bank Governor Alan Bollard has pulled off the impossible. He's sent a signal to the Government that the central bank does not consider its $10.9 billion tax-cutting programme inflationary.
Yet he has also provided its National opponents with the necessary cover to offer substantially larger tax cuts without facing charges their party is simply out to bribe voters.
National's finance spokesman Bill English grabbed the opportunity, saying his party could make its cuts without worrying the inflation watchdog. The logic is simple enough.
When Finance Minister Michael Cullen unveiled the Government's tax cuts in his Budget he justified them as a necessary counter-cyclical stimulus - the upshot of a rainy day Budget that was affordable because he had built up a big nest egg after eight years' prudent management.
Cullen invited the Reserve Bank to look through the inflationary effects of his increased fiscal stimulus and view the cuts as a necessary offset to household pain.
Bollard has done exactly that, giving Cullen the ammunition to have a poke at the banking economists who slated his Budget as putting an inflationary roadblock in the way of the Reserve Bank's timetable to cut interest rates.
But the central bank has also issued forecasts that predict a more negative economic outlook than the Treasury forecasts on which Cullen justified the size of his tax cuts.
This gives National the necessary political cover to argue a more serious tax-cutting programme would simply provide the necessarily larger fiscal stimulus to offset the more negative outlook without tempting the inflationary dogs.
It's pretty basic politics. But the debate needs to move on to a higher plane. If National leader John Key retains the courage of his convictions - a quality that eluded his predecessor Don Brash - he should go further and reclaim lower taxes as the necessary element in building an internationally competitive economy. Not simply some version of tax-relief or middle-class welfare only dished out when the economy is in the soup.
It's not surprising that after nearly nine years of socialist envy, where Kiwis earning more than $60,000 have been labelled rich by the current Government, that we now export a higher proportion of our skilled people than other Western developed nations.
They're not leaving simply because of the monetary rewards offered elsewhere, though who could blame them when the golden weather of the past nine years has been built on a low wage economy, but because they want to be winners and live where modesty is not the national virtue.
Key is a natural tax-cutter - by heart a fan of the Irish model of using low tax rates to attract foreign direct investment. Particularly for greenfields investments where the investors get a lower tax rate for investing in new enterprises that provide more jobs for our skilled people.
With unemployment forecast to rise substantially over the next few years, a serious programme based on competitive company taxes could provide another counter-cyclical stimulus. Particularly if National devised some mechanisms for foreign investors to take advantage of New Zealand's China free trade agreement.
There is no sign yet that this thinking forms part of National's election policy. Key floated the potential at the last election when he was National's finance spokesman.
The prospect would have been explored in a post-election feasibility study.
But English - a former Treasury official - now wears the finance hat. He is more conservative and might require more convincing.
But a major personal tax-cutting agenda will not be difficult to support. All Key and English need to do is reprise official documents showing Treasury has repeatedly advised Cullen that personal tax cuts would stimulate more economic growth. And that Cullen has repeatedly rejected them.
There will inevitably be opposition from some news media to the notion that lower taxes are a social good.
Our national discourse has unfortunately become hijacked by the belief that tax cuts should be viewed purely through the inflationary lens rather than the real incentives they provide for people to better themselves. If New Zealand is ever to achieve a high wage economy this bogey has to be tackled.
The political wisdom would suggest that given the economic outlook this would be the election Labour should want to lose: Any incoming Government would be faced with making decisions that would prove deeply unpopular.
In fact, the converse is true. The negative outlook provides exactly the "burning platform" that will enable an incoming Government - particularly a National one - to take a fresh look at New Zealand's economic drivers.
Labour held the Catching the Knowledge Wave conference in 2001, but was too slow to adopt the ideas and policies put up by the key business, academic and professional communities.
If Key wants to model himself as a force for positive change he could also look at how Barack Obama has captured the imagination of American elites. Obama's resounding message of hope and change has taken the junior Senator to being the Democrats' presidential nominee for the United States presidency.
The National leader may lack Obama's oratorical skills but the lesson is there. If Key wants to inspire New Zealanders he should paint the picture of a gutsy independent New Zealand with its sights set on resounding success.
