Island Life by David Slack

A virgin's guide to tax cuts

I love paying tax. My biggest regret is that I wasn't in the top bracket when Muldoon was PM. I could have been handing over as much as 66 cents in the dollar then. Just the other day the accountant rang to discuss what we should pay for next weeks' provisional tax. She'd worked it out already, but I said to push it up another 30,000 just to be sure. She thought I was just being prudent. I didn't tell her that in fact I love the idea of paying as much tax as I possibly can.

Such lies, as Ms Kember nicely puts it.

I don't feel inclined to paying any more tax than I need to. So why am I not in a lather of excitement about the National party's plans for giving me a break? I agree with everyone who has emailed me in the past few days telling me they'd like to pay less tax. So would I. But not at any cost.

Michael Cullen says the government needs as much as it does. Dr Brash says vast amounts of that money are being soaked from us for needless schemes. I wouldn't accept either of those propositions without a hard look at the numbers. But the more I look at them, the more I think that one of them is being prudent and the other is bending his words to fit the billboards.

I deliberately designed the tax calculator to demonstrate one particular aspect of this tax debate because it was the one that seemed to me to have the most pertinence to the billboard and bumper campaigning Dr Brash has been doing. Namely: we can cover the cost of a tax cut by cutting wasteful government spending.

What that implies is that it doesn't matter whether you have a surplus of eight billion or a deficit of four, that question is irrelevant. Slash wasteful spending to cover your lost revenue, and you can fund your cuts right there. Nice and simple, and boy does it read well on a billboard. But it's nonsense.

As the calculator demonstrates, as soon as you implement a cut of any heft, you need to abolish entire government departments to get the savings you want. That doesn't just banish the analysts who might or might not be wasting space, it means you have to start throwing overboard the people who do the uncontroversial stuff as well. The ones who pay the pensions, stamp the passports, pay the teachers and the police, and keep an eye on minor issues like foot and mouth disease and mutating avian flu viruses.

But don't just take my word for it. Ask someone who's run the Treasury. Here's what well-known lefty Graham Scott had to say to an ACT function this week:

At the risk of immodesty, the fact is that I know more about controlling government expenditure than the National front bench. They are talking as though it will be easy to cut enough fat from the state to pay for tax cuts - it won't be. Believe me I've been there and I have done that. The combination of the State Enterprises Act, the Public Finance Act and the State Sector Act, which I helped to design and implement, brought remarkable improvements in the effectiveness of public organisations and lower costs. I wrote a textbook about it. But those systems have not been used vigorously for a while and some slack has got into the system. We can get better value for money but it has to be done with a scalpel not an axe.
They say they are going to cut waste out of the health sector but also preserve front line jobs. Fine, who could object to that, but if they try to do this in a way that interferes deeply into the prerogatives of the DHB Boards and management there will trouble. As the former Chair of the Health Funding Authority I have the experience to know what works and what doesn't in quest for better value for the health dollar.
Designing tax cuts is child's play. It is on the expenditure side where all the problems are and where skill and experience are needed.

Let's say that Dr Brash might change his mind and decide to argue that tax cuts cannot be funded purely by slashing wasteful spending. Let's say he argues it on the same basis as one or two writers of spluttering emails to me: THERE'S AN 8 BILLION DOLLAR SURPLUS THAT COULD COVER THESE CUTS. CAN'T YOU ADD, IDIOT?

If you should happen to be the dyspeptic type who has already had two responses from me to this question, I recommend you read the foregoing paragraphs. Slowly.

Having said that, the surplus is undeniably an important question. That and the cost of the spending commitments Don Brash and his team have been making.

Surplus first, then. This argument goes nowhere fast if you can't even agree on the starting point. So I'll state what I understand the numbers to be. Do by all means feel free to correct me. You have your OBERAC, 7.445 billion, and your cash surplus, 2.413 billion.

Your cash surplus equals your OBERAC minus a number of items:

- The one and a half billion or more that goes into capital purchases such as new machines for hospitals and building new prisons.

- The three quarters of a billion that goes to loans - students and District Health Boards for example.

-The two billion or so you put aside to save for future New Zealand Superannuation costs.

-The half a billion or so that goes into cash injections for Crown entities to help them build hospitals and housing.

-And the nearly three quarters of a billion that goes into reserve bank reserves to maintain financial stability.

The actual figures are here at page 26 of this Budget document. Number crunching ends. Discussion resumes.

I entirely recognise the argument that instead of spending that money on these items you could borrow them. I entirely recognise the argument that if you borrowed that money, you'd have enough money this year to cover the tax cuts.

But borrowing money has a cost. 65 million per year, per billion of tax, Treasury says. And yes, that would then leave you some billions spare for cuts.

But that then brings on inflation, and it pushes debt back up and if you have to borrow it more than one year and maybe many years, you're suddenly carrying a much bigger burden. And then you might be wondering how smart it was to strip out the buffer against downturn that the 2.4 billion cash surplus represents.

And this is a good year. Once there are no surpluses, you get a whole lot more to wear.

And if you pile on the Nat's 7 billion of new spending promises, well, it all gets to be a much steeper hill to climb.

Of course you could ditch the super fund, but neither major party is proposing to do that, and for good reason: ditch it and you have an even bigger problem down the track. Nothing imprisons a person like poverty in old age. Just how little would you like the pension to be in 2020?

So yes, there is an alternative way to deal with this surplus. But how smart an idea is it to do a U-Turn on the steady reduction of government debt when so much of our sorry economic history lies back up that road of higher interest rates and inflation? Borrowing to invest in a more productive future is great, but look at our track record: we suck at it.

Fran O'Sullivan gets an important part of the picture right when she writes:

Quite why Cullen would expect a populace that binges on personal debt to fund its over-lavish lifestyle and ridiculously out-of-whack property prices, to continue to forgo today's pledges in order to earn a better tomorrow, has always seemed to be dangerously out of sync with New Zealanders' underlying ethos.

What New Zealanders want is more cash in their pockets so they can continue to fund their habit of living beyond their pay packets.

If they can't get it through wage rises, then another avenue must be found.

But there are also people who are battling along with rather more modest expectations who are finding that it's pretty bloody hard to support a family on the average wage. You'd think they might be pleased of the relief that comes in the Working For Families package, which is in effect a targeted tax cut, and yet you're just as likely to hear the gripe that they don't want to be a beneficiary, they want a plain-old-fashioned tax cut.

Some, though, seem to be a little more clear-eyed, PA reader Rob points out: "many of us 'mainstream New Zealanders' have already had our tax cuts."

It's called the working for families package. As the lucky father of five, I have a reasonably well-paying job and end up paying (gasp) almost NO tax. (esp if you take into account a loss-making side business and the subsidy on the twins' creche).
I don't know how that's gonna play out, but I'm convinced Mr Brash can't give me a bigger tax cut than almost nothing! In fact, it seems likely WFF will be rolled back in some way.
I think that's where the Nats "mainstream NZ" appeal may fall over. After you've excluded maori, the (likely childless) gays AND families... you're left with the economic self-maximisers who voted for act- and who else?


What is it with the Nats and their fascination for simple fixes and magic bullets? If a tax cut and a hands-off approach to economic management is the sure-fire answer, how come we saw so little fresh investment of those tax cuts in the 1990s and how come we saw the economy mired in torpor by the end of their last run?

It's nice to imagine things could be as simple as the billboards suggest, but they're no more grounded in reality than a Star Wars movie, and as the Letterman Show so acutely observed once, there are at least ten disappointments in watching one of those. The cruellest of them, perhaps, is this: when the lights come back up in the movie theatre, you're still a 37 year old virgin.