Politics: Lurking Laws of Budgets and Taxes

New Zealand Management, May 2012 | Go to article overview

Politics: Lurking Laws of Budgets and Taxes


Byline: Colin James

It's Budget month, Bill English's fourth. He's back to zero net new spending, this time because of weak revenue, not an earthquake. This is a big political gamble. And it illustrates a lurking law of taxation.

The gamble is that voters in 2014 will care more about a return to fiscal surplus than about service guarantees. That might be a risky call.

In the 2011 election campaign John Key irreparably damaged Phil Goff with his "show me the money" taunt in the second one-on-one debate, imputing fiscal irresponsibility. Labour was already far behind. That set it back even further.

But a zero-new-spending Budget (as in 2011 after the second Christchurch earthquake) will likely mean some services cuts this coming fiscal year. More with less is achievable for only so long in the short term and new methodologies that do enable it need longer to mature than National has allowed.

Likewise, if English sticks to his February Budget Policy Statement track for 2013-14 and 2014-15 of $800 million and $1.2 billion net new spending, that will barely keep pace with rising health and education demand and also maintain other services before the election, which will be no later than November 2014.

The priority targets announced in March might also cut into services not accorded top priority. Ministers want to parade the priority 'results' in the election campaign. That will put agencies under intense pressure to deliver those results, potentially at cost to others.

Ministers might then find accumulated voter grudges about patchy services outweigh voter acclaim for fiscal probity.

English's best hope will be that the economy grows faster than the Treasury projects, growing revenues faster and giving him more leeway for new spending while still delivering his surplus.

That was a good part of the motivation for the tax switch in 2010 when English traded lower income tax rates for higher GST. Lower income tax is supposed in economic theory to make an economy go faster and deliver higher total revenues from the lower rate. …

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