KEY POINTS:
The Prime Minister has a new spin on tax cuts. She now says she wanted to cut tax across the board as long ago as 2005 but did not have the advice to support such a move then. Doubtless part of her would have liked to reduce personal
rates in that election year - National was making headway in the polls with a promise to do so - but it is hard to find the advice she blames for not doing so.
If she had been pressing her Finance Minister to lighten the load on all income brackets in 2005, her pressure would have been evident the previous year when the Treasury produced the December fiscal update that traces economic trends and outlines the Government's intentions for the next Budget. There is no hint in that 2004 document that the Government was contemplating any such thing.
In the month preceding that Budget the subject was much in public discussion. The Labour Party president had predicted a pleasant surprise which, much to Michael Cullen's frustration, was assumed to be the tax cut. Expectations became so high that Dr Cullen had to do something. He agreed to raise the income thresholds by small amounts, the infamous "chewing gum" cuts subsequently rescinded.
Had Helen Clark been determined to cut taxes more substantially, the political climate could not have been more favourable. So, indeed, was the economic outlook. Dr Cullen believes the state should run healthy surpluses in good years and run them down when the economy slows. In 2005, he knew the economy would slow over the next two years as it had hit its capacity after several years' strong growth, immigration was lower, interest rates higher and the dollar strong.
But when Dr Cullen has judged conditions favourable for a fiscal stimulus he has increased spending rather than reduced taxation. Much of his spending has been far-sighted - the super fund, KiwiSaver incentives - but tax cuts might have had more immediate benefits for an economy with labour shortages. It is hard to believe the Treasury would have advised against them.
It is equally hard to believe the Treasury's advice would be much different today. Promising personal tax cuts across the board in next year's Budget, the Prime Minister said the Treasury had now advised that the sustained surplus was "structural", not cyclical. But the Budget has been in surplus since 1994 and the black ink has survived one or two cyclical troughs in that time.
The Government has been treating the surplus as structural for at least five years. It would not have set up the "Cullen fund" for superannuation if it believed surpluses could not be sustained. It was the Government's choice to save or spend its annual excess revenue rather than permanently lower taxation. It always had the latter option and it is a bit rich now to blame advisers for the choices it made.
Labour's conference at the weekend applauded their leader's talk of tax cuts "across the board". That could mean no more than a revival of 2005's threshold increases but it should raise the bar substantially for the top rate. Labour's 39c rate on incomes above $60,000 is now paid by more than 12 per cent of earners. To catch only the top 5 per cent , as originally intended, it needs to raise the threshold closer to $80,000.
This time even Dr Cullen sounds resigned to finding "something for everybody", though that means, he warns, not much for anybody. No matter, as long as the cut is not a selective "credit" like the family rebate a few years ago that only added to public liabilities. A genuine tax cutter does not differentiate between the overtaxed, he simply ceases to take more than he needs. Next year we might get it back.
