John Armstrong: Cullen's gift to National

To the catalogue of great disasters - the Titanic, the Hindenburg, Michael Jackson's marriage to Lisa-Marie Presley - can be added the words "Michael Cullen's sixth Budget".

The Finance Minister has done the seemingly impossible: turning wine into water. He had the huge advantage of a fat surplus and a robust, if slowing economy, but his Budget is an election-year flop.

That is bad enough. It gives sustenance to the political adage that when things go wrong, they keep going wrong.

But what is worse is that the Budget has done the exact reverse of what Labour intended, intensifying the groundswell for tax cuts rather than stifling it.

It just happens that, for once, Labour has been the victim of its relentless pragmatism.

The party's ruthless capacity to do almost anything to ensure Helen Clark gets her "historic" third term inevitably meant the annual guessing game of what was in the Budget would focus on the one thing that has left it exposed - its refusal to cut taxes.

The possibility that Labour might bite the bullet on tax cuts fuelled expectations ahead of the Budget - expectations that were not satisfied when the miserly size of Cullen's actual cuts was finally revealed.

The National Party cannot believe its good fortune. It already felt the public mood was no longer so hostile to the notion of tax cuts. Now the environment is even more receptive to the party's more radical programme of reductions, which it will unveil shortly.

Of crucial significance, National can now make an unobstructed pitch to middle-income voters who miss out on the targeted assistance in Labour's Working for Families programme.

While Cullen was never going to be able to match the scale of National's cuts - its package amounts to some $2 billion-plus - the danger was that Labour would try to take the gloss off what National intends to do by fully inflation-adjusting income thresholds at which higher tax rates cut in.

That would have seen someone earning $68,000 getting an extra $22 a week, reducing to $13 for someone on $50,000 and falling to $6 for those on $40,000.

Naturally, Cullen jibbed at this. It would have seen the well-paid getting more than the low-paid. It would have cost him a hefty $600 million in revenue.

It would have made a nonsense of his warnings that significant tax cuts were both unaffordable and inflationary. It would have made a nonsense of Labour's preference for targeted assistance to working families.

It would have had Cullen publicly back-tracking from his insistence - expressed to United Future when it called for thresholds to be so raised - that the Government had "higher priorities".

All that added up to a compelling case for doing nothing.

That would have made more sense than the bizarre compromise which will see someone earning about $10,000 a year waiting for three years before getting the princely sum of 67c extra a week, while higher income-earners will get $10 at most.

Just why Labour would put itself in such a ridiculous position is puzzling, even allowing for its acceptance of some level of inflation-indexing of thresholds as a pay-off to United Future for its support.

Was Cullen rolled - as National's John Key suggests - by the Prime Minister demanding some concession to tax cuts after her Finance Minister kyboshed the tertiary education savings scheme she mooted? That is mere conjecture.

What is definite is that Labour's failure to offer anything beyond a token has provided a springboard for National to launch its tax policy, the details of which are still under wraps.

It is also a major psychological fillip to Don Brash who, alongside finance spokesman John Key, will try to turn the election campaign debate on economic management into an argument about the desirability of substantial tax cuts - not just in boosting household incomes, but as an economic incentive to stop the "brain drain" to Australia.

But the policy is also a major branding exercise for National. The centre-right party has lived in daily fear of being gazumped by centrist-leaning Labour. But it will not be gazumped on tax.

The scale of National's cuts is apparently such that that the party was always confident Cullen could not match them in the Budget, even had he wished to do so.

There was no plan B. National did not need one. For example, had Cullen lifted the threshold for the top tax rate from $60,000 to $70,000, it appears National would go substantially further.

Last year Brash initially flagged that priority for tax relief would be given to low- and middle-income families. But the help they get in the Working for Families package - elements of which National would retain - means high-income earners will now also benefit earlier.

However, cuts in company tax may be delayed until later in National's first term, partly to avoid Cullen's charge that National would over-stoke the economy.

All up, National's tax policy has been written with the intention of presenting a sharp contrast to Labour on a core issue.

National would tax people less than Labour. But it would spend less than Labour.

That goes beyond mere ideology. The declared intention to spend less is also recognition that National - preferably before the election campaign is under way - must neutralise Cullen's line that substantial tax cuts are unaffordable without slashing core Government services, particularly in the health and education sectors, because Government surpluses will tail off as the economy slows.

While Key questions whether things will be as gloomy as the forecasts suggest, he is rebutting Cullen by saying National would focus on wasteful Government spending. Key is looking for $1 billion in such savings through a review of "baseline" spending by all Government departments.

He has also singled out easy targets such as the Tertiary Education Commission and the Maori Television Service as examples of "bloated" bureaucracy.

As finance minister, Key would also run slightly lower surpluses, fund more capital works from borrowing, and commit to lower levels of new spending.

Most voters will find such matters far too technical - which is why Key is trying to get Cullen bogged down in them.

That aside, on tax at least, the choices at this election will soon be very clear.