Fran O'Sullivan: Playing safe may be dangerous game

Finance Minister Michael Cullen was right about one thing: his seventh Budget had one or two "shallow secrets", as far as business is concerned the granddaddy of them all being his confirmation that there will be no tax cuts for business until April 2008 at the earliest.

This "shallow secret" was of course foreshadowed time and time again by Cullen in pre-Budget spin sessions designed to ensure journalists stayed on message in their post-Budget reporting.

What the Government wanted to get across was that it was delivering on its mantra that this Budget has three prongs: economic transformation, national identity and family friendly policies.

Unfortunately for the spin-meisters, business had different expectations from the Budget which again displays shallow thinking as far as spurring short-term economic growth goes.

Businesses that now face an economic slowdown - where even the Treasury (one of the most pessimistic forecasters around) projects GDP to be just 1 per cent over the year to March 2007 - would have welcomed a fiscal boost to their coffers through immediate corporate tax cuts.

It's not as if the Government doesn't have the funds.

Cullen was yesterday foreshadowing an $8.5 billion Budget surplus in the year to June 2006, up from the $5.6 billion projection at half-year.

Inland Revenue - which ought to know - is forecasting $1 billion more in corporate tax flows from businesses in the 2008 and 2009 years.

A less risk-averse Finance Minister would have used the IRD forecasts (which were based on its surveys of firms) to bet the book by dropping the corporate rate now to match Australia's 30c rate.

Then he could ride high on the obvious fiscal boost it would achieve as firms invested more, paid their staff more and returned more dividends to their shareholders. All of this would get caught by the Government's tax net at the personal income tax level.

The Treasury advised Cullen to introduce tax cuts in its briefing to the incoming Government last year. But it got short shrift.

IRD also told the incoming Government it should cut corporate rates to stop businesses relocating or using transfer pricing to reduce tax paid here.

Business lobbyists tried to drive a wedge between the Prime Minister and Cullen, arguing the top personal tax rate of 39 per cent should be reduced to 33 per cent and the company rate cut to 28 per cent from 33 per cent to boost economic growth and ensure our companies and sole traders could become more competitive against Australia. But to no avail.

Cullen instead played safe by covering off a shortfall in roading funds and pledging the Government will borrow more to ensure that infrastructure investment, particularly in Auckland, is complete.

But there's more.

Treasury is concerned that businesses will react to falling profits by entering into aggressive cost-cutting which could lower investment and employment with subsequent flow-on effects into private consumption growth.

If businesses decide on this route - rather than simply shoulder labour costs - Treasury's operating surplus forecast for the 2008 June year suddenly develops a $1 billion hole at the very time Cullen has intimated the Government's business tax review will be implemented.

That review was supposed to be released next month. But Cullen says that's now unlikely.

Last year, Labour Party president Mike Williams copped the blame for hinting to journalists that Cullen's sixth Budget contained a "deep dark secret" - widely interpreted as personal tax cuts. When Cullen unveiled minor changes to tax thresholds the most higher income earners could look forward to was a 67c-a-week increase in their take-home pay - the price of a packet of chewing gum.

Cullen is now wobbling.

He said yesterday that the forgone revenue from the scrapped $350 million carbon tax had to be taken into account when weighing whether to proceed with tackling bracket creep.

It was the type of fiscal syllogism that would have made a Reagan budget director blush - particularly when coupled with Cullen's homily:

"The fool who spends on the upturn will find himself broke on the downturn."

Cullen's no fool - but business will wish he's not the only one who gets to do the spending.