Fiscal purist not above pump priming

Michael Cullen

The sheer gall with which Labour has played to middle New Zealanders during the 2005 campaign through a $911 million carefully targeted spendup should be enough to make Finance Minister Michael Cullen's pink cheeks blush red.

After all it was just three months ago that he bore the brunt of their wrath when he announced a piddling movement to index personal tax rates against inflation rises in his sixth Budget.

But he chortled in his Beehive office earlier this week, "time has passed by".

"The way the Nats have mishandled their own policy has left us more free room."

On Thursday, Labour again raised the election stakes by using its second taxation windfall in three months to gazump National's upcoming tax cuts announcement with a $438 million plan to boost middle-income families' wallets.

Just two days earlier, Cullen was expounding to the Herald about growing economic pressures after three years' strong growth. "The last thing the Government should be doing at this point in this year is feeding a huge amount of extra spending power into the economy.

"Look at the labour market, the inflation rate, the current account deficit. Economic management says governments should be careful about the level of stimulus beyond what was already in the Budget."

On Tuesday, he warned of a monetary policy response that would be difficult to avoid if "you suddenly threw another billion or more in this current year".

And said that although the corporate tax take - which is $700 million ahead of May forecasts - was well up, it was volatile.

"It would not take much of a downturn to start moving to losses."

How does Cullen, the arch fiscal purist, explain this extraordinary turnaround?

Particularly when he had been concerned his recent $500 million boost for business in his sixth Budget had been overshadowed by the personal tax cuts controversy.

"I probably should have killed the [tax cuts] speculation. But bluntly in this office we sort of decided that nobody was going to believe that given the number of speeches I'd given.

"It would have been incredible if I'd suddenly come up with tax relief across the board.

"Imagine what the reaction would be like to that ... It would have been treated with a high degree of cynicism."

On his basis, Labour's decision to enter the bidding war at this election - with targeted tax relief - should provoke a cynical response. But right through the campaign, Cullen has been careful to make a semantic distinction that Labour's big-spending pledges are "party policy, not Government policy".

What is not so clear is how Cullen can explain away Labour's latest electoral bribe, which puts 60,000 more families on the state's payroll at the expense of those that pay full taxes, while upper income earners and single people must wait three years to get any relief at all through the indexation policy.

On Monday, the distinctions will sharpen when National unveils its own tax cuts.

Personal cuts will inevitably be centre stage. But from a business perspective, National's promised corporate cut to match that of Australia's will also be in the frame.

Cullen suggests debate in the business sector on the merits of a corporate tax cut has been simplistic.

"I don't think people often in New Zealand realise how much further down the track in rationality of tax design we have gone than most other similar countries."

He ticks off a range of "fiddly taxes" such as stamp duties that have been axed.

"We have an imputation system and a relatively flat scale compared with most countries. We don't have social security taxes, which many countries do ... nor payroll taxes or capital gains taxes."

But the Finance Minister does concede that New Zealand may be forced, over the longer term and for competitive reasons, into a less simple and less elegant design of the tax system.

"I quite deliberately in last year's Budget put out the challenge to business 'Give me a payroll tax like Australia's and I'll give you a corporate tax reduction' ...

"It's kind of Ralph Waters' (Fletcher Building CEO) point: You've got to look at all the points of the jigsaw puzzle.

"What continues to concern me is that, unfortunately, we've become our own worst enemies. We are setting up a self-fulfilling prophecy by concentrating on the one bit where we are a bit higher.

"We've actually persuaded the rest of the world we've got higher corporate tax. I don't think that's a bright move actually on our collective part, on a New Zealand Inc perspective."

Cullen first won his Cabinet spurs during David Lange's reign as Prime Minister. Inevitably Lange's death provoked some soul-searching during the Herald interview.

"The first-term stuff of deregulating financial markets - the bonfire of subsidies - could have been ameliorated with transitional assistance. But it had to be done because we'd just reached an end point of everybody subsidising everybody else.

"But it started to get really ideological and we lost reality of what was actually do-able; that's what I found so scary."

He concedes those earlier experiences have led him to take a cautious approach to fiscal management.

What concerns him is making sure New Zealand is well-placed to withstand the demographic transition that will be stepped up as post-war baby boomers get older.

He set up the NZ Superannuation Fund - colloquially known as the Cullen Fund - to take pressure off future super costs. Also on his agenda are measures to increase New Zealand's long-term savings record at the personal and national level and funding the pressure on health costs. He again cautions against an expansionist fiscal policy.

"I think if we are just reasonably controlled over the next 10 to 20 years ... we're going to be much better positioned than most other developed countries to cope with the change."

His secondary focus is to underpin activities that contribute to economic growth.

"Where I differ from some in the business sector is about what some of those imperatives are."

An election survey released by the Auckland Chamber of Commerce survey on Monday showed many businesses favour National over Labour on economic issues.

Cullen maintains the Auckland business sector does not realise for instance just how much the Government has geared up infrastructural spending to deal to the roading problem. He maintains the businesses compliance costs cuts mantra is similarly misplaced.

"We don't have high compliance costs by developed country standards.

"But compliance costs are a feature of developed economies, those things like waste disposals and dangerous goods. You do expect to have high safety standards."

The productivity gap between New Zealand and Australia is also an issue.

"Their tax system has tended to encourage investment in capital rather than labour. So they have tended to have a higher unemployment level at any particular point than we have had.

"Our tax system has tended to encourage investment in labour rather than capital. So our growth has been heavily driven by increased labour participation, reduction in unemployment and some increase in working hours.

To achieve a shift towards a greater uplift in productivity there will need to be greater concentration on skills development, savings and infrastructure.

"The tricky bit is we don't want to change the tax system really - and I don't think we should - but Ralph [Waters] is actually right that part of the difference may be due to that. We don't want to adopt a system that leads to higher structural unemployment.

"If we get ourselves up to a 2 per cent productivity growth rate we'll be doing very good."

Lower labour rates could also be used as a selling point to attract more investment from across the Tasman.

Cullen clearly enjoys the company of the new wave of Australian CEOs running businesses here whom he has got to know during his pursuit of an Australasian single market agenda.

"They're relaxed. They tell jokes. I used to get into trouble telling any jokes."

Cullen is not planning a ground-shifting agenda if he gets a third term as Finance Minister. His strategic objectives are focused on dealing with the fallout from rapid economic growth: capacity constraints and infrastructural issues, skills and immigration.

Is this as good as it gets?

"No, we have the capacity to grow more strongly over a long period of time. And despite the business surveys, the public has much more confidence in the long-term future of this country.

"But I think we're much better placed than we were 10 years ago ."

Unlike his Australian counterpart, Peter Costello, Cullen does not want to be Prime Minister, although he was sounded out to lead Labour when Helen Clark's poll ratings plummeted in 1995.

"My own ambitions are to carry on doing what I'm doing, and I take life one term at a time now I'm 60.

"I don't have a long-term vision of me as a politician ... I take time out at golf and being at home."