Cullen looks to past for Budget ideas

An eerie transformation began to steal over Michael John Cullen's features a few years back. He came to look more and more like the sainted 1935-40 Labour leader, Michael Joseph Savage.

But underneath there has been another transmogrification: Cullen's Budgets bear a passing resemblance to those of Sir Walter Nash, Labour's first finance minister from 1935-49.

Nash set a standard for Labour: he balanced his Budgets, taxing "to the economic limit" to do it, though he did also borrow "for productive effort". That is to say, he balanced his Budgets on the revenue side, not the spending side - he raised taxes to meet his expenditures.

That worked a treat in the late 1930s by fuelling consumer spending power as the country was emerging from the Depression, though it wrecked the balance of payments and forced Nash into import quotas.

The previous conservative government had made the mistake of deepening the Depression by cutting spending when the catastrophe hit in 1930. But Nash eventually fell into the same trap - albeit the other side of it. He went on spending in the late 1940s when the economy was up and that fuelled inflation.

Life in the Minister of Finance's suite for 35 years after Nash was one of, to quote the Peanuts cartoon, "ups, ups and more ups".

Ministers boosted spending when the economy slipped and then kept spending when it climbed. Result: an inflationary spiral - all the way to Sir Robert Muldoon's goetterdaemerung in the early 1980s when he and keynesianism were buried under massive double deficits on the balance of payments and the Budget.

It was into that inflationary cauldron that Labour's third Finance Minister, Sir Wallace (Bill) Rowling stepped in December 1972. Rowling was the first I knew on the job. Nash I met only once. The second, Sir Arnold Nordmeyer (1957-60), of the infamous Black Budget of 1958 which taxed alcohol, cigarettes and petrol to pay for an irresponsibly generous tax bribe in the 1957 election, I knew only in his last years as an MP.

Rowling was of a new breed of youngish formally educated Labour "modernisers". He came to office armed with an economics degree and to high expectations. He also arrived at a time of high agricultural prices and to serve a prime minister (Norman Kirk) who worked methodically through a big book of large spending promises. Inflation took off even faster.

Instilling Treasury caution in his gung-ho comrades was a forlorn task for Rowling, who was more dogged than commanding.

The best he could manage was a currency upvaluation to try to curb inflation. But his efforts - and eventually the Government - were undone by the first oil shock in late 1973 which delivered the OECD world into the maws of stagflation.

The agricultural commodity boom evaporated and Rowling's successor, Bob Tizard (Rowling became Prime Minister on Kirk's death in 1974), was swamped in a desperate double-deficit.

That ended the golden age of social democracy Savage and Nash launched - though no one in the Labour party grasped it then and most to this day wish deep down they could recover the illusory certainties of 1972.

This is Cullen's conundrum. He is the pivot in the Clark Government's piecemeal construction of the new social democracy which must live in a globalised, trade-focused world that punishes wanton treasurers.

As an historian Cullen knows Labour's past. As a mathematician he must respect hard numbers - that simpler world has gone forever.

Nash and Co could treat the economy as if it was locked in a box. They could regulate what went on in the box and say what could go in and out. But in 1984 Sir Roger Douglas smashed the box open - or, rather, allowed market forces to smash it open as they did the Soviet Union's iron economic casket.

In the wake of that shattering of economic innocence in the 1980s - Muldoon could be said to be the last of the Labour-type finance ministers - Cullen must deal with an economy naked to the world. He has had to invent a different, more constrained Labour economic management.

At the heart of that is something else Cullen has learnt from history. "Inflation is a tax on the poor," he told me once, explaining why he, on Labour's left, was supporting the revolutionary Reserve Bank Bill. The better off can escape inflation by juggling assets and tax. The less well-off don't have those tools and must always play catch-up to racing prices.

Deficit Budgets are inflationary. That, too, is a lesson from history.

So Budgets must be balanced over the business cycle. That is one of Cullen's iron beliefs.

Hence his political problem with the huge Budget operational surplus. THIS business cycle has roared on and on, way past when economists thought it could. While the cycle is up - and especially when it is a long way up - he has to keep running surpluses, otherwise he will fuel inflation. He must let the "automatic stabilisers" operate, sucking some of the heat out of the economy by way of taxes.

And what taxes! Cullen shares this with Nash: he balances his Budgets on the revenue side. One thing you can bet on in a Cullen Budget: the tax take up, spending up.

Sure, he slices a little here and there off specific tax items (like FBT) or allows some more depreciation and breaks for research and development. But he taxes to the "economic limit", which these days is as much as foreign funds managers will wear before they pull the plug. Nash's ghost again.

That is light years from Douglas's obsession with lower tax - even a flat tax, proposed in December 1987 and the trigger for his demise. Cullen is also light years from Douglas in his willingness to regulate when things go awry and particularly to regulate the labour market, to back centralised state health and education and to hang on to state-owned enterprises. Shades of the old days.

But Cullen has had to accept Douglas's open economy - or rather, David Caygill's open economy. Caygill drove the de-protection as one of Douglas's associates and also Trade and Industry Minister.

The fifth Labour Government will be remembered as Helen Clark's. But it is also now frequently called the Clark-Cullen Government.

That is a measure of Cullen's importance, not just as Finance Minister but as manager of the Government (Deputy Prime Minister and Leader of the House) and also the man who takes charge of tough topics such as infrastructure and the foreshore/seabed. And now he is also Attorney-General.

In that reach across the Government, too, Cullen evokes Nash who was deputy to Peter Fraser, Minister to the US during World War II, and held a raft of other portfolios.

Also like Nash, Cullen is a master of detail and minutiae - but, unlike Nash, he does not get so lost in the detail he doesn't make decisions.

There is yet another ghostly parallel with Nash: over time Cullen the lefty has become Cullen the small-c conservative - crusty, even, though also often patient and kindly.

And Cullen is a persuasive presenter of the Labour case, a skilful, compelling, witty and sly debater. The Budget next Thursday will sound plausible, even where it is vulnerable to criticism. He is in command. Nash's ghost again.