Brian Fallow: Robbing Peter to pay Paul

The Government, it seems, is not above trying to get $2 worth of political credit for $1 of tax relief.

When the context is the fiscal surplus and whether tax cuts are affordable, it likes to point to the size of the tax breaks for savers and businesses in the coming Budget.

Michael Cullen said on Friday that it would amount to hundreds of millions of dollars - the equivalent of a 2c or 3c cut in the company tax rate, but targeted like smart bombs to give more bang for the buck.

But at the same conference of tax practitioners, Cullen repeated what he first made clear last December, that "the overall 'business package' in the Budget will be partly funded by the revenue from a carbon tax".

It smacks of double-counting.

To the extent that the Budget package of tax relief is funded by a new tax, it is an exercise in robbing Peter, the energy consumer, to pay Paul, the businessman or saver.

That may well be a sensible thing to do.

It is a shift towards taxing things we want less of, such as emissions of greenhouse gases, and away from taxing things we need more of, like savings or investment in equipment and machinery.

Any price signal - even a faint one delivered through something as unwieldy as the tax system - that the right to emit greenhouse gases is not going to remain untrammelled forever is worthwhile. We need energy prices that tell us the environmental truth.

But the closer the overall tax package in the Budget comes to being revenue-neutral, the less it can be used to silence the clamour for tax cuts.

Cullen has another, more creditable argument on that score.

It is called intergenerational fairness and it underpins his preoccupation with keeping a lid on Government debt.

With a demographic bulge of baby-boomers heading towards retirement, New Zealand Superannuation, even with the Cullen fund, will cost the taxpayer a lot more.

At the same time, healthcare costs, already growing at an unsustainable rate, will swell as well.

In that context, he says it is hardly fair to ramp up the debt-servicing costs that future taxpayers have to meet.

Already, with what are by historical and international standards low levels of Government debt, it costs more than $2 billion, or 5c in every tax dollar, to pay the interest bill.

The ageing population haunts Cullen's fiscal strategy.

The policy is to run surpluses on average over the economic cycle big enough to cover contributions ($2.1 billion this year) to the New Zealand Superannuation Fund, which will partly fund future pensions, and to manage total debt at "prudent" levels.

Cullen defines prudence as slowly reducing gross sovereign debt from about 23 per cent of gross domestic product now to below 20 per cent in 10 years.

It is worth noting the reference to the economic cycle.

There is no doubt that some of the surge in tax revenue and, therefore, the operating surplus during the past year can be put down to the lagged impact of a period of strong economic growth.

That is most evident in the steep rise in the company tax take. PAYE and GST revenue, nine months into this fiscal year, were up 7.1 and 7.8 per cent respectively on the same period last year, but the corporate tax take was 19.4 per cent higher, or an extra $1 billion.

It would not be prudent to expect any major part of the tax base to keep growing at nearly 20 per cent indefinitely.

The focus on the debt objective means that this year Cullen will do his best to direct our attention away from the operating surplus to the cash surplus.

In previous years, the next cash surplus (or more often deficit) has languished unregarded at the very back of the Budget tables, as the amount available to repay debt or needing to be financed, as the case may be.

The operating balance is calculated in a way intended to mimic a company's profit-and-loss account.

It reflects operating costs including interest and depreciation, but not actual capital expenditure or provisioning.

So the operating balance, which gets the headline treatment, reflects nurses' pay but not spending on new hospitals.

It includes teachers' pay but not student loans.

It includes the money paid to superannuitants but not the money put aside in the Cullen fund. Soldiers but not LAVs. And so on.

Cullen's argument is that the capital items still have to be paid for and that is money unavailable for tax cuts or spending on something else.

The Government's operating cashflow for the first nine months of this fiscal year was a net inflow $6.7 billion, 47 per cent more than at the same time a year ago.

It had $37.6 billion of cash coming in ($35.1 billion of which was tax), while it paid out a total of $30.9 billion in operating costs, transfer payments and finance costs.

Just over half of the $6.7 billion has been used to make contributions to the Cullen fund ($1.5 billion), to buy physical assets such as land and buildings for schools or prisons, and to advance $900 million in student loans, housing loans and loans to district health boards.

That left the Government in funds to the tune of $3.3 billion, or $400 million more than it expected to be at that stage of the fiscal year, reflecting, it said, higher-than-forecast tax receipts and delays in the purchases of physical assets.

It suggests that the net cash surplus available to repay debt at the end of this fiscal year will be handily more than the $1.2 billion forecast last December.

In the end, the cash balance is no less misleading an indicator of the affordability of tax cuts than the operating balance is.

Why should you pay for long-lived infrastructure such as roads out of cash? Borrowing for such purposes is normal.

Likewise, if the Government is to act as a banker to students, it should do so on both sides of the balance sheet and borrow the money it on-lends.

Fundamentally, ability to meet future pension and healthcare costs depends on the size and health of the economy then.

Cullen needs to persuade us that his fiscal prudence does not impose too high a tax burden now, which will hobble the economy's growth.