Fran O'Sullivan: Hey, big spender

Finance Minister Michael Cullen's sixth Budget will ensure the election will be fought at the hip-pocket level.

His decision not to cut taxes for three years - and even then by an extremely parsimonious lift of the income thresholds at which the respective tax rates kick in - opens the way for a real contest between Labour and National/Act who want to cut taxes quicker.

Cullen's Budget will no doubt be portrayed - particularly by himself - as yet another fiscally conservative effort by a prudent Treasurer. To his credit, he has tackled long overdue areas such as the need to stimulate savings, boost defence spending and reduce costs (some) for business taxpayers through a raft of "at the edges" tax reductions which will - classically - be offset by the new carbon charge.

Business will welcome the changes to depreciation rates, new R&D rules, fringe benefit adjustments, and streamlining of GST and provisional tax payment dates.

But at the bottom-line, this is essentially tinkering.

Cullen has yet again passed up the opportunity to promote a trail-blazing Budget that leaves it up to businesses and individual taxpayers to determine their own future growth paths through a flatter company tax structure and a quick reversal of the fiscal creep which has seen the number of so-called "rich" more than double since the top tax rate of 39 per cent was imposed.

Combined with the disappointing outcome of last year's Working for Families package - which substantially increased the number of people on direct state support - it is clear that Cullen's preference is to continue down the big Government spending path rather than put cash back into people's pockets and trust them to know what to do with it.

Little of real substance has changed since I wrote on last year's Budget that Cullen had left the fiscal coffers so bare that National would be forced to signal the spending cuts it would make on attaining office in order to retain credibility as it headed into the election battle. In essence: Labour investing for the future versus National squandering through tax cuts.

The Finance Minister was quick to make just that point on Thursday when he challenged National leader Don Brash to isolate what spending cuts he would make to fund substantial tax cuts after Brash admitted it would be difficult to fund substantial cuts given the spending level.

Brash (and Act) must take Cullen at his word if they are to make a fist of it at the election.

Cullen's sleight of hand on the shift of focus from the oberac or operating balance to the Government's cash position was well-telegraphed and will confuse ordinary punters. Voters wanting to know whether his prudent fiscal management has ensured yet another bumper Budget surplus (oberac) or if the cupboard is really too bare (cash position) for opposition parties to prudently pledge tax cuts will be confused.

They will be even more confused if they try and work out what is the real nature of Government spending (line-by-line) on a continued basis, as the frequent shifts in time horizons for individual policy boosts is mind-numbingly difficult to keep track of.

But what cannot be stripped away - or obscured - is the fact that tax revenue is now forecast to reach $54.3 billion in the 2005/06 year. This is an enormous increase in tax revenues since Labour came to power in 1999 and will stick in the craw of those whom National and Act, in particular, wish to appeal to.

When Labour fought the 1999 election, it pledged to introduce a top tax rate of 39 per cent for those earning more than $60,000 - which it said would affect just 5 per cent of tax payers. Figures just released show 11 per cent of people are now in the top tax bracket - but must wait until April 2008 for any relief. Given those top tax bracket earners are also stumping up 48 per cent of income tax - with the top 3 per cent funding 25 per cent - there is ample opportunity for National and Act to make political hay out of their discontent.

The Tax Facts released with the Budget package are somewhat deceptive as they lump in state beneficiaries (such as super and other welfare beneficiaries) along with working people who do not get a state top-up. But figures released to the Herald by Inland Revenue showed that in the March 2003 year, 10.57 per cent of taxpayers (excluding superannuitants) stumped up 42 per cent of tax revenue, 20 per cent of those fell purely into the $60,000 to $70,000 bracket.

Given the numbers earning more than $63,000 - which is where Cullen has pledged to shift the 39 per cent threshold - will inevitably continue to grow, it's a fair bet the Finance Minister will be able to fund the forthcoming "cuts" to a large degree from current income - ie "fiscal creep".

Combine that factor - with the extraordinary decision to offer tax breaks to new migrants and returning New Zealanders on certain of their foreign income, which are not open to other Kiwis, and a groundswell of discontent is inevitable.

The key question is whether National and Act will know what to do with the discontent?

* Richard Inder's column returns next week.