John Roughan 's Opinion

John Roughan is an editorial writer and columnist for the New Zealand Herald.

John Roughan: A tax cut is not the right call

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John Key readily gives Bill English the credit for the fiscal discipline that has produced a surplus. Photo / Mark Mitchell
John Key readily gives Bill English the credit for the fiscal discipline that has produced a surplus. Photo / Mark Mitchell

John Key has been lucky to face largely left-wing criticism. It has suited critics such as Bryan Gould, long ago a Labour MP in Britain and latterly a frequent contributor to the Herald, to paint him as a fiscal conservative, callously squeezing public spending when a stimulant was required.

The criticism has suited Key, he wants to be seen as a fiscal conservative. But it is not true, a fiscal conservative would not be contemplating a tax cut right now. It was never true.

A telling table was published in this paper on Monday, listing the Budget surpluses and deficits over the past 20 years. It showed that having inherited a deficit of $3.8 billion from Michael Cullen in 2008-09, National nearly doubled it the following year (2009-10), and the year after that it blew out to a whopping $18.3 billion, worse as a percentage of the economy than any deficit Muldoon had run.

If a Labour Government had produced a deficit of that proportion - 9.2 per cent of the value of the economy - Key would have been calling it a disaster.

He would have said it left the country in no shape to absorb the fiscal shock of the Christchurch earthquake that occurred four months before the end of that fiscal year.

But Labour could not make that criticism of his deficit in 2011 because Key had announced a programme of asset sales to take to the election that year and Labour was staking the election on its opposition to them. If it criticised the deficit it would help make the case for the asset sales.

National's second term has been more fiscally conservative, though still without cutting public spending. Bill English always believed that the deficit could be erased by keeping annual increases within $1 billion and reaping more tax revenue as the economy recovered. So it has proved. The $18 billion deficit was halved to $9.2 billion in 2012, $4.4 billion in 2013, $2.4 billion in the year ending next month and a surplus for the years ahead.

Key readily gives English the credit for the fiscal discipline that has produced these surpluses but English this week clearly wished Key would contain his impatience to cash them in with tax cuts.

They both know it is not the surplus that really matters, it is the debt they have accumulated. Michael Cullen ran surpluses averaging nearly $5 billion for eight years. He did so to constant calls from National for tax cuts. Fortunately for the economy, Cullen ignored them. By the time the 2008 recession arrived, he had reduced the public debt to practically zero.

Since then, six years of recession deficits have created a new debt of about $60 billion, 26 per cent of New Zealand's GDP. Fiscal responsibility recommends it be reduced to less than 20 per cent before another economic "shock" occurs. The Government seems in no hurry.

It has budgeted for the debt to rise again this year on capital expenses and then start to decline. It will not drop below 20 per cent until 2020, assuming no tax cuts in the meantime. Tax cuts within the next three years would be simply irresponsible. Key this week raised it as one possibility among several that the surplus presented. It could be in the programme National takes to the election in September.

If it is, it will be an admission that National is in serious trouble. The fact that Key even suggested a tax cut this week suggests National's polls are giving him bad news after the Judith Collins saga.

If the Prime Minister thinks he needs a tax cut to ensure the Government's re-election, it will be high-risk. His case for a third term rests almost entirely on economic management. Nothing else in the Budget this week demanded an extension of time.

If he resorts to a tax cut, he could again be lucky, though. David Cunliffe might try to match it. Fiscal responsibility does not work for Labour electorally, though it should.

It is an enduring myth of politics in most countries that the party of the right is more financially responsible. In fact, the left has usually been more careful to balance the books. It may do so at higher levels of spending and taxation than is good for the economy but it is less likely to run up debt when the economy is doing well.

This week, we learned how well the economy is doing. Though the Christchurch rebuild is providing a temporary stimulant, we have a lasting improvement in the terms of trade for food exports and a sudden rise in population as fewer New Zealanders go abroad.

Few places are as prosperous right now. Few can boast a Budget surplus, a sign of sound finances. A tax cut would signal the reverse.

- NZ Herald

John Roughan

John Roughan is an editorial writer and columnist for the New Zealand Herald.

John Roughan is an editorial writer and columnist for the New Zealand Herald. A graduate of Canterbury University with a degree in history and a diploma in journalism, he started his career on the Auckland Star, travelled and worked on newspapers in Japan and Britain before returning to New Zealand where he joined the Herald in 1981. He was posted to the Parliamentary Press Gallery in 1983, took a keen interest in the economic reform programme and has been a full time commentator for the Herald since 1986. He became the paper's senior editorial writer in 1988 and has been writing a weekly column under his own name since 1996. His interests range from the economy, public policy and politics to the more serious issues of life.

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