When Bill English gave a preview of the Budget in a speech last week he explained why reducing debt is more important than cutting taxes with any surplus revenue he may have. "Net Government debt increased from 6 per cent of GDP in 2008 to 25 per cent of GDP last year as a result of the global financial crisis and the Christchurch earthquakes," he said. "Although our debt levels aren't high by international standards, we could be stretched if another economic shock or natural disaster hit."
On the subject of tax cuts, he said, "Lowering income taxes remains a Government priority ... However, as we have always said, tax reductions remain dependent on fiscal and economic conditions. With continuing tight fiscal forecasts, we don't currently have an explicit provision for tax reduction in the fiscal forecasts."
He was talking not just about the Budget he will deliver next Thursday but also the one he will draw up next year, election year. He said, "At this point, we've prioritised additional debt repayment over setting aside money in Budget 2017 for tax cuts." He explained that a $2.5 billion allowance for additional spending in that Budget had been revised and a portion brought forward to this year to meet the costs of servicing a population growing faster than expected.
He could hardly have made it clearer that tax cuts are not in prospect this year or next. So why did the Prime Minister fail to make it equally clear when he was questioned this week about the possibility of tax cuts? "We are not ruling that out for 2017 or campaigning on it for a fourth term in 2017," he said. But at least he agreed with his Finance Minister that it would depend on a Budget surplus. It is just a pity John Key did not make it equally clear that paying down debt has priority.
This is a subject on which Mr English and Mr Key have always struggled to sing in perfect harmony. It may be no more than the normal tension between the task of chief financial officer with a flinty eye on the figures and a chief executive with all the elements of marketing on his mind, but it is odd that Mr Key does not try harder to stay in tune. It is not as though talk of tax cuts will greatly help National win a fourth term. It won a second term and a third without them. In fact National won those elections on a record of fiscal responsibility, having cancelled the second of two rounds of tax cuts planned before it came to office in the global crisis.
The economy continues to enjoy stronger growth than most in the wake of the crisis more than seven years ago. With continuing high net migration gains, good numbers of tourists and rising returns from non-dairy exports, notably beef and wine, next week's Budget will present a bright picture. It needs to do something more to contain house prices but that problem, too, is a symptom of economic success. New Zealand is attractive to migrants and investment because much of the world is so slow to finally recover from the crisis. When they do, our fortunes could change.
We should be reducing debt faster while the good times last, not talking about tax cuts.
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