Fran O'Sullivan: Cullen's nifty fiscal sleight of hand

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What's really behind Finance Minister Michael Cullen's push for employers to pay higher wages?

Think about it a bit. Cullen does.

People want tax cuts. Tax cuts cost money. (I don't really want to make them - but Helen says I should or we'll lose the election.)

Employers have more money (I've already cut their company taxes. Employers should fund tax cuts.)

This example of a fiscal syllogism is not as daft as it might seem.

The reality is that if employers stump up more in wages - as indeed they should if New Zealand is ever to match First-World conditions - then some of the cash Cullen will have to carve off his surplus when he dishes out personal tax cuts will be replenished through the additional tax that employees will pay on their wage or salary increase.

Neat, isn't it?

Sort of like a gigantic fiscal money-go-round, the kind of thinking that will get up the noses of employers in a rather large way.

Employer groups have wasted no time in retorting that the issue is a productivity one.

Their reasoning is that if the Government got out of the private sector's way and stopped crowding out private investment, productivity might just increase along with wages.

The issue is not a simple one, and while Government, employer and union groups have been focused on New Zealand's productivity challenge, the increases have been small.

Cullen might be excused for expressing some frustration with employer lobbies.

He argues he has cut company taxes, as they requested. And Cullen is right to question how much of the extra income left in companies' pockets has been invested in new plant and equipment, or upskilling workers to drive a productivity lift.

This difficulty was foreshadowed in the New Zealand Herald's 2006 Mood of the Boardroom survey, which polled major company chief executives and small to medium-sized firms which are members of Business New Zealand.

The poll found that if there was a corporate tax cut:

65 per cent of CEOs would use it to pay staff more.

91 per cent of them would use it to retain earnings for investment.

64 per cent would increase dividends.

As Cullen suggested at that time, the upshot was that a significant portion of the lost revenue from a straight reduction in the company tax rate would flow through to employees and shareholders, rather than go immediately into investments which increase productivity.

Let's not be unfair to employers, here. They are under enormous pressure to offer higher pay packets to attract staff. They are also in a vicious circle where paying more to staff means they have less revenue to retain for capital investment or to pay shareholders extra dividends from increased profits.

The reality - and it's one that employers need to face - is if they don't pay higher wages or salaries, they won't have a business. Staff will simply go to places such as Australia, where employers were given the "get real" message years ago.

But employers also have a point. New Zealand's company tax rate has lost competitiveness. Cullen took too long to reduce the base rate from 33 cents in the dollar to 30 cents to match Australia's headline corporate rate. This unfortunate reluctance to face basic competitive pressures is now colouring the Finance Minister's attitude to personal tax cuts.

Cullen slagged National's tax-cut evangelism last week claiming that beneath its talk of the transformative power of tax cuts was an agenda to undermine the role of Government in society and win elections.

So why aren't Cullen's plans for a programme of personal tax cuts also about winning the election and undermining the Government's role in the economy?

Cullen doesn't buy into this particular syllogism. He claims a higher moral purpose and has put four conditions on the programme.

Labour will not borrow to pay for tax cuts, will not cut services to pay for tax cuts, will not exacerbate inflationary pressures and will not allow tax cuts to lead to greater inequality in society.

The final condition is potentially the most damaging one to New Zealand's ability to claw back its competitive advantage as far as talented people are concerned.

Inequalities are a fact of life, Dr Cullen. That's why we live in a capitalist society rather than a communist one, and offer incentives to improve your lot.

It's a moot point whether Labour's decision to wipe incentives for New Zealanders to improve their lots - through some misguided desire to make an equal society - has simply encouraged more people to move offshore.

In any event, Cullen's comments would be treated more seriously if the Government had applied a salary freeze for Cabinet ministers until other New Zealanders caught up, or a higher tax threshold for those earning more than $200,000.

The fact is that Cullen and Co have paid themselves very nicely over the past eight years and also ensured good pay rises for those on the State payroll. Meantime they have squeezed the retained income available to companies by taking too long to cut the corporate income tax rate.

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