Editorial: Cullen's deep, dark anticlimax

Opinion

Michael Cullen would like his 2005 Budget to go down in history as another exercise in prudent fiscal management. It will not. It will be remembered for its timidity and for allowing a gilt-edged opportunity to slip by. At a time of much economic cheer, Dr Cullen has pinpointed key areas of concern - and then done very little about them. At its worst, this failing permeates the Budget's centrepiece, the introduction of a work-based savings scheme. But it also shows in a coy personal tax initiative that is certain to become a major public relations headache.

The KiwiSaver scheme has two basic flaws that suggest it will do little to encourage a savings culture. First, it is easy for employees to opt out. Secondly, there is little reason why they will not, given the meagre incentive to stay on board. On offer is a Government contribution of $1000 to each new member, and the availability of a one-off draw-down for first-home ownership. Nowhere is there the sort of incentive that would allow the scheme to play a significant role in lifting New Zealanders' level of savings. Employers will "be able" to make top-ups - as is the case with the state superannuation fund - but they are given no reason to do so. Missing is the encouragement that would have been provided, most logically, by a cut in the company tax rate from 33 to 30 per cent.

Dr Cullen, in fact, damns the KiwiSaver project by spelling out his own modest expectations. He predicts that only 265,000 employees will be in the scheme in 2008, a dismally low figure, especially given the small number involved in today's workplace schemes. The best that can be said is that a savings vehicle is to be put in place. In the long run it could prove the catalyst for a much-improved culture if allied with strong incentives or compulsion (even though Dr Cullen says now that he wishes to maintain a voluntary approach).

But the Government's more immediate problem lies in the decision to postpone the inflation indexing of income tax until 2008. All this week it has done nothing to halt speculation about a "deep, dark" Budget secret, much of which centred on an immediate benefit to taxpayers. The detail and the delay make the long overdue initiative distinctly underwhelming. A "deep, dark" anticlimax.

Equally, it hands the National Party the opportunity to make tax a key point of differentiation in the coming election. There is a widespread perception that New Zealanders are overtaxed. That sentiment can only be heightened by the operating balance for the year showing a higher-than-expected $7.4 billion surplus - and the expectation that, despite a slowing economy, the surplus will average about $5.3 billion until 2008-09.

Dr Cullen has boxed himself into a corner by insisting that the ratio of gross Government debt to GDP keeps heading towards 20 per cent. The accepted ratio used to be 30 per cent. It is now 22.6 per cent - a figure that, says Dr Cullen, places New Zealand among a "top handful of countries" - and is forecast to fall to 20 per cent by 2006-07.

Lower levels of Government debt are obviously prudent. As the Finance Minister says, they lower the risk premium in interest rates and reduce the need to react sharply to economic shocks. But National can quite reasonably ask whether prudence is being taken to extreme. Whether allowing the debt ratio to slip a percentage point or two would be so harmful, or place an unreasonable burden on future taxpayers. And whether a little less caution and a tweaking of spending priorities would leave room for significant tax cuts.

Prudence and pragmatism should never be discarded lightly, and it is to Dr Cullen's credit that there are few election-year enticements, and a pointer to slowing Government spending. But when circumstance allows, big issues, such as New Zealanders' deplorable savings record, demand bold responses. Not the faint-heartedness that is the hallmark of this Budget.