John Armstrong: Fighting a losing battle over tax

This may not have been Michael Cullen's last Budget. But it may turn out to be Cullen's Last Stand. It will be remembered for little else.

Like the hopelessly-outnumbered General George Custer at Little Bighorn, the Finance Minister grits his teeth and fights on regardless. There will be no surrender to tax cuts.

However, you are on a loser when the first few pages of your Budget are devoted to explaining why you are not doing something.

Hardening the language against tax cuts - "the fool who spends on the upturn will find himself broke on the downturn" - will not ease the pressure mounting for them once more. It just makes retreat more difficult.

Worse, Michael Cullen's otherwise rather-forgettable seventh Budget if anything makes the case for those arguing for lower tax rates even stronger. The surplus for this year is now expected to hit a staggering $8.5 billion - nearly $3 billion more than the Treasury was forecasting only six months ago.

This has enabled Dr Cullen to provide for extra spending of more than $12 billion over the next four years. If he has the freedom to spend more, National correspondingly has the choice to tax less.

Dr Cullen's reply is that Treasury forecasts the Government accounts will be in deficit between 2007 and 2010.

But he has been cut down by his own cavalry in the form of Inland Revenue's projections of the size of the tax take. These are more optimistic than the Treasury's. If Inland Revenue is right, the cash deficits get a whole lot smaller or evaporate altogether, with Dr Cullen's argument.

His downer on tax cuts is puzzling for other reasons. Everyone knows income tax thresholds will have to be addressed before the next election.

And they will have to be raised above the desultory offering in last year's Budget, especially as more and more taxpayers find themselves paying the top tax rate of 39c on income over $60,000. When Labour set that rate in 2000, 5 per cent of taxpayers were affected. That figure is now 12 per cent.

Furthermore, as Dr Cullen acknowledged yesterday, the current review of business taxes might force a lowering of income tax rates if the rate for companies is cut.

So why paint yourself into a corner? Dr Cullen would argue he is not opposed to tax cuts - just big ones which would force the Reserve Bank to tighten the screws.

His refusal to flag cuts down the track has filled the hole in the "doughnut" Budget left empty by the leaking of the Telecom decision.

Labour usually learns from its mistakes. But Dr Cullen seems incapable of getting the tax monkey off his back.