National's tax cuts pledge: Something has to give

Are National's tax cuts as unaffordable as Labour suggests?

The question for voters appears to be what will go from government services to pay for the package announced on August 22 by National leader Don Brash.

Detailed information to make that assessment is sparse, aside from some broad areas already earmarked for cuts.

The extent of the remaining cuts would be known only if National gains power. It would conduct major reviews of most government department spending.

The spending cuts are to help fund its tax cuts, which would cost $2.2 billion in 2006-07, $3.3 billion in 07-08 and $3.9 billion in 2008-09. That's a cumulative total of $9.4 billion.

The tax cuts include not going ahead with the planned carbon tax, cutting the company rate to 30 per cent in 2008 and cutting personal income tax thresholds.

The policy means a single income earner with no children on $50,000 will get $28 extra a week from April 1 next year, and $46 a week from April 1, 2007. The actual impact on wallets will vary as it depends on income and the number of children, if any, a taxpayer has.

As well as $9.4 billion in tax cuts - which is lost revenue - National is promising about $2.2 billion in new spending, more than half of which is for roads.

Labour's promises so far total about $3.5 billion cumulatively to 2008-09, including $1.3 billion on its targeted "family tax relief" package launched just days before National's tax cuts.

Since National's tax package was released, its website has recorded more than two million hits. Voters are now able to compare National's plan with Labour's family tax relief.

The main difference in the impact on the public between National's and Labour's packages is how many people they affect, and what they get. Labour is targeting tax relief at families with children in lower and middle-income brackets - last month's announcement brings to 350,000 the total number of families to benefit.

National's plan would affect more than 2 million taxpayers - but its package is much more expensive because the jam is more broadly spread.

The question Labour is posing to voters in its advertising is whether they are prepared to see cuts of about $3.7 billion - its figures - in government spending.

National's own figures put the total of spending cuts and axing some of Labour's initiatives at just under $3 billion.

Yesterday, Finance Minister Michael Cullen went on the offensive, saying National's promises did not stack up. 

National has said that to fund its alternative budget - which sets the scene for its tax cuts - it will borrow more than Labour plans to for capital spending, run a lower surplus, and review and cut some government spending, targeting "waste".

It believes it can cut a total of $1.2 billion by 2008-09 from government spending. Areas already identified include axing low-quality sub-degree tertiary courses, "low-quality" programmes such as some run by Te Puni Kokiri and the Ministry of Social Development, "welfare delivery" changes and axing some business help grants.

National would also cancel Labour's planned buildup in Reserve Bank funds to intervene in the dollar, which would free $700 million. A further $1 billion would come from not proceeding with Labour's KiwiSaver and home ownership help schemes, and indexation of tax thresholds from 2008.

Details of the rest of the cuts would come only in the big reviews of departmental spending. "We expect it to be a three-year programme of detailed review," says National finance spokesman John Key.

National has said any gains made in reviews of health and education will be poured back into frontline services.

Mr Key claims state sector managers have told him privately there is plenty of fat to cut.

Yesterday Dr Cullen called a press conference to show graphs he says illustrated how National's plans are "just crazy".

He says the oberac (operating balance before revaluations and accounting changes) surplus to fund the tax cuts is already more than 100 per cent pre-committed to other investments over the next four years.

The cumulative cost of those investments - including the NZ Super Fund, student loans, and investment in hospitals, state enterprises and other assets - to 2008-09 totals $27.5 billion.

But the oberac was only forecast to be a cumulative $23.4 billion - leaving a $4.1 billion deficit.

Dr Cullen says the extra cost of tax cuts would be $7.2 billion, requiring $3.5 billion in extra borrowing and $3.7 billion in cuts to health, education and other items.
He challenged National to explain why it believed it was legitimate to "buy their way into office".

Campaigning in Rotorua yesterday, Dr Brash rejected the criticism, saying the tax cuts were "absolutely affordable" and accusing Labour of trying to scare the public.