Teachers are striking, hospitals are short of money but the Government - elected after signalling tax rises to lift social spending - is ridinghigh in the polls. In the first of a five-part series, deputy political editor VERNON SMALL asks whether the spending has made a difference.
Mr or Mrs Average
Wealthy Earner - let's call him or her Dr Awe - earns $1865 a week.
As a representative earning the average of those in New Zealand's $60,000-plus top tax bracket, Dr Awe's annual salary is $97,000.
By Easter Monday, the second anniversary of Labour's rise in the top tax rate from 33 per cent to 39 per cent, our mythical doctor will have paid $4440 more at a rate of $42.69 A week as a result of the new tax step.
Dr Awe and the 252,000 others hit by the new top rate are estimated to have poured an extra $1 billion into the Treasury's bank account in those two years.
In the overall scheme of things, the extra tax may be small beer - about 1 per cent of the Government's Budget - but it was the key to Labour's pitch at the 1999 election.
Faced with a claimed crisis in social spending, and a fiscal position weakened by a series of tax cuts implemented by National's Bill Birch, the incoming Coalition pledged to take "a little more tax" off high income earners like Dr Awe.
The money was earmarked for a series of election promises: to restore the married rate of superannuation to 65 per cent of the average wage; reinstate income-related rents on state houses; lower students' costs; shorten waiting times for surgery; cut burglary and youth crime; and boost jobs by encouraging industry and regional development.
Labour had expected the new tax rate to raise $450 million a year.
In reality, it harvested more than $550 million under the combined influences of a growing economy, inflation, and so-called "bracket creep" as more income earners entered the top tax bracket.
Labour had expected 5 per cent of taxpayers to be stung, but that has grown. A little more than 7 per cent of the approximately 3 million taxpayers are now estimated to be paying 39 per cent tax on at least one dollar of their income.
But far from being harmed, Labour's popularity among the better-off has actually grown in line with the rise in the party's across-the-board support since the tax was imposed.
The latest Herald-DigiPoll survey gave the party more than 51 per cent backing - enough for a comfortable majority without the support of the Greens, New Zealand First or the faction-riven Alliance. And it can claim the backing of about a quarter of voters in the $70,000-plus bracket.
In the same income group, just under half back National, and almost a quarter opt for Act. UMR Research polling of the same top bracket shows Labour up from 35 per cent support in early 2000 to 45 per cent, National up slightly from 34 to 37, and Act more than halved to 6 per cent.
Labour's own pollster, Steve Mills of UMR Research, says there is no question the party's support has grown among the wealthy. But he attributes that to an increase in support across all income groups, rather than something peculiar to the better paid.
But how has Labour managed to increase its popularity while raising taxes not only on top earners but also on the bulk of the population via tax rises on tobacco, petrol and diesel?
Its explanation is simple: "We underpromised and overdelivered. We kept our promises simple, and the voters are rewarding us for that."
But Opposition politicians believe there is a simmering discontent with the Government's performance that is yet to show in the polls.
In recent weeks, National and Act have hammered the message in the House: despite Labour's limited "pledge card" promises, there was a general expectation that the extra tax would "fix health and education".
They say the health system is a mess, health boards are deep in debt, and Labour's traditional supporters, nurses and teachers, are clamouring for more pay.
First, the case for the defence from the man holding the purse strings, Finance Minister Michael Cullen.
Dr Cullen says the polls do not suggest a backlash, but that in any case the top income bracket is not the key to Labour's fortunes.
He admits that Labour did suffer at times "a bit of softness in the $35,000 to $45,000-a-year income bracket", which was the crucial group.
"If we get solid support in that group, then there's a Labour-led Government. We had 39 per cent in the election and the polls have been 48 and 54 per cent at the moment."
Dr Cullen says the extra tax went mainly to pay for the six spending promises on the plastic pledge card which Helen Clark used to woo voters at the last election.
Based on a formula tried by Tony Blair's Labour Government in Britain - and likely to be repeated at this year's election - it was designed to give voters a touchstone to measure Government performance.
Dr Cullen says it is unfair to say the Government promised too much.
"We were always clear that so-called 'fixing health' is a very long-term project indeed, in the sense that there is always pressure at the margins in terms of increased demand versus limited - capped, if you like - resources. I don't think there should have been any misunderstanding about that."
Waiting times had been reduced for most procedures, and there was more democracy in health administration thanks to elections for some positions on health boards.
But new drugs, new procedures and an ageing population all put stress on the Government's ability to meet people's expectations.
"It would be possible to spend a great deal of money in health, and still there would be some demand at the margins that would not be met. That reflects the fact that we still have a system which does not allow for an intelligent public debate about the connection between what people are prepared to pay for and what they get."
The extra money for surgery waiting times was $74 million in 2000-2001 and $158 million in subsequent years.
(The Government has since earmarked a further $2.4 billion extra for health in the next three years.)
To fulfil the other spending promises, more than $100 million a year went on income-related rents, and the increase in the superannuation level cost $212 million. Lowering the cost of student loans took $110 million a year (although $351 million more was taken from the capital account to cover extra loans taken up by students).
Reversing National's planned cuts to the police, plus some extra money, took the total to $130 million a year extra and helped to lower burglary rates, Cullen said.
Extra finance for Industry NZ and regional development in the coming year's Budget will be $116 million.
So how does the Government assess whether all that spending was value for money.
Cullen covers the Herald's tape-recorder and in a stage whisper says: "The polls."
Although he is adamant that he will not raise taxes again after the next election, he says the exercise was worthwhile beyond the ballot box. Access to tertiary education had improved, fees had been held and the Government was subsidising a higher proportion of the costs of student loans.
"So students have benefited out of that."
Returning the superannuation baseline to 65 per cent of the average wage for a couple, paid at age 65, had ensured that a lot of pensioners did not slip below the poverty line.
"All the estimates were that was going to happen with the lowering of the relativity National had planned.
"Certainly, all the evidence of the social agencies is that the shift to income-related rents for state houses has had a major impact in terms of improving net incomes of many low-income New Zealanders, not all of whom are beneficiaries."
If Cullen has a proviso, it is the slow start to some of the initiatives of Jim Anderton's pet project, Industry NZ.
"It has had some teething problems, which is not surprising - we always anticipated there would be. But it can point to some significant successes. It's certainly developing programmes that I think will be of considerable impact in terms of economic development.
"So overall I think, yes, the increased spending has been justified. Money well spent and consistent with the overall objectives of the Labour-Alliance Government."
So why not another tax rise, and another $400 million-plus for more social spending?
"At the margins one could achieve some significant improvements, particularly in areas like health and probably tertiary education - and particularly, perhaps, early childhood education. But Labour certainly won't be going into the election with any proposals to lift income tax rates or GST rates or company tax rates."
That did not mean excise taxes on alcohol, petrol and tobacco would not rise.
Not surprisingly, Cullen's rosy assessment and the level of public acceptance of the tax-and-spend pledges are rejected by the Opposition.
Act's Rodney Hide takes the most radical stance, striking at the very heart of the Treasury's assumptions.
He insists that far from raising more tax, the new 39c step actually left Government income lower than it would otherwise have been.
"They did not raise much, if anything. There is no doubt in my mind that the tax increase was revenue negative."
He said the Treasury looked at how much revenue would be generated, not at the economy as a whole.
"It is a static comparison - they don't think how the economy would have performed without the tax rise."
In his view, the extra tax curbed growth and drove high achievers overseas.
"Treasury are simply not prepared to admit what every economist knows - that higher taxes are a negative for growth."
He said the tax rise symbolised an attitude that, if you earned more than $60,000, you were rich and successful and would be punished.
"It reverberated around the world."
Both Mr Hide and National leader Bill English reject Labour's "spin" that spending the extra tax fulfilled its election-year promises. They believe that Labour on the hustings raised expectations far beyond the "pledge card" issues.
"They promised to fix health, fix education, fix mental health problems, you name it. They always said the tax rise would pay for it. The other 95 per cent [who did not get a tax rise] were supposed to clap. But health is the same mess it was two years ago, and our schools are not performing any better, so they haven't achieved what they said they would achieve with the extra tax," Mr Hide said.
He claims Labour's leadership was careful not to put its extravagant promises in writing.
"But if Dr Cullen didn't say it directly, he implied it."
Mr English agrees.
"The argument was that if you elect us we will put taxes up and fix health and education."
Those high expectations were consistently cultivated, especially among Labour's traditional backers in the fields of health and education.
Mr English said that during the campaign he had spoken to nurses from the same platform as Helen Clark.
"She got a standing ovation and I barely got a clap because I told them the truth - that it was always going to be difficult."
Those heightened expectations were now haunting Labour as nurses and teachers fought for the extra pay they believed Labour would deliver.
"This Government was greeted with joy by the same people who are bitterly fighting them. In my view they overpromised because they were totally unrealistic.
"They misled people totally in the debates about the nature of the problem. They always said the nature of the problem was us [National] and they won that argument. But actually, the problems are the problems."
Yet with Labour blitzing National in the polls, where is the proof that the public is so badly disappointed?
Mr English blames a mix of spin, voter fatigue and pressure on Labour's disgruntled constituency not to rock the boat.
"They have managed the issues better. People had years of dealing with these issues. We mishandled a lot of them. They just don't want to have to think about them for a while."
Ministers were also telling Labour's supporters not to be disloyal when they tried to discuss poverty or beneficiaries' problems.
"Their management of the critics is much tougher and much more comprehensive than ours ever was. So you have got an artificial suppression of debate."
Though Mr English agrees with Mr Hide that Labour is dashing public expectations, he is less doctrinaire about the likely impact of tax rises on the Government's income.
He agrees with the Treasury that more revenue was raised, although, like Mr Hide, he says anecdotal evidence from tax accountants suggests widespread efforts to avoid the extra impost.
Dr Cullen argues that it is impossible to measure such avoidance activity accurately.
"I don't think it has been anything like as much as was anticipated because we seem to have actuallycollected rather more than we anticipated - not a huge amount but a little bit more."
In its own planning, National is budgeting for the extra tax to deliver a figure "quite a bit higher" than the Treasury's estimates.
Mr English said he was being conservative in estimating the impact as National debated whether to reverse the increase. But it will not release its decision until mid-April - "We are having a good hard look at it," is Mr English's stock reply.
At the centre of the debate is what priority National should give to lowering the 33c corporate rate.
Mr English believes National must explain the economic benefits of atax cut and sell those to votersrather than rely on self-interest.
Soundings of public opinion had detected a far wider acceptance of the economic benefits of low taxes than many imagined.
If he is right Dr Awe and his well-paid colleagues - and National - may have unexpected allies among the lower paid for a return of their $42.69 a week.
But even if the polls are right, and National languishes on the Opposition benches for another three years, Mr English does not expect another tax rise from Labour.
"This time he [Dr Cullen] has got the surplus, so he doesn't need the tax."
On that, at least, the two sides agree.
Feature: The billion dollar question
Teachers are striking, hospitals are short of money but the Government - elected after signalling tax rises to lift social spending - is ridinghigh in the polls. In the first of a five-part series, deputy political editor VERNON SMALL asks whether the spending has made a difference.
Mr or Mrs Average
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