Wednesday, August 24, 2005

How National will fund its tax cuts: borrow like there's no tomorrow

Keith Ng has found how National is going to fund its tax cuts for the rich: a $12.8 billion increase in gross sovereign debt over three years. It's all buried in an innocuous-sounding phrase in the fine print to the fiscal strategy John Key released on Friday:

Gross sovereign issued debt is forecast to be approximately 1% higher relative to GDP than currently by the end of the forecast period.

Note "than currently", rather than "than currently forecast". Current debt is 25.3% of GDP; forecast debt is 19.1%. That one missing word means a difference of 7.2% of GDP, or around $12.8 billion - very close to the size of National's tax cuts and spending promises.

Now, this could be an innocuous mistake on Key's behalf. But Keith called him, and was fobbed off onto a researcher who could not be reached until morning. As one of his friends (who it must be said is a government spindoctor) said, if he'd had something so basic wrong, Key would have corrected him there and then. It also makes it clear why National has refused to release their projections in a budget-style balance sheet - because they can equivocate in words, but numbers don't lie.

I don't know about you, but I think there's only one word to describe a party which would indulge in Muldoon-scale borrowing to fund tax cuts for the rich: irresponsible. We've spent the last twenty years trying to kick that crack habit, at enormous social cost. Any party which would take us back down that path is simply unfit to hold office.

Again, this could be a mistake. But if so, its easily corrected; all National has to do is release their projections in a balance sheet format, where there can be no doubt about what the numbers actually are.

Update: Keith got it wrong - and yet, reading his retraction, also right. National's phrasing was deliberate, but the baseline is taken from 2006, when National would present its first budget if elected, not 2004, as Keith had assumed. This means gross sovereign-issued debt of 22.3% of GDP rather than the 20.2% Labour had estimated in the budget, or the 19.1% it is currently planning on. The difference is around $3.2 billion - not $12.8 billion as initially reported.

Of course, there wouldn't be this confusion if National had issued a proper balance sheet with its "projections"...

As a final note, the interest on National's proposed borrowing is around $150 million a year. That amounts to a medium-to-large policy, or to use the opposition's favourite currency, about 10,000 hip operations.

Update 2: Made the debt baselines clearer in the above.


why has the post disappeared from Public Address?

Posted by Anonymous : 8/24/2005 10:25:00 AM

Because it is being retracted. I'm waiting for the retraction so I can link to it in the update, but I'll note that there wouldn't be this confusion if National had issued a balance sheet in the first place.

Posted by Idiot/Savant : 8/24/2005 10:29:00 AM

Keith's retraction is up.

Posted by Anonymous : 8/24/2005 10:42:00 AM

This whole tax cuts stuff seems to me to be hiding the real debate.

No, really.

In the long run the govt must balance their book (uh, unless you collapse, and that's very bad). so your actual tax rate is the rate at which the govt spends.

If the govt taxes less than it spends it runs up a debt, that you need to pay off later. So some of your taxes are deferred (and collect interest in the meantime).

If the govt taxes more than it spends, then it's either paying off debt or building up a surplus, in which case you may be paying some taxes in advance.

This "starve the beast", "strategic deficit" notion is just silly: look at the US, where tax cuts 4 years ago have constrained spending by $0. If the US republicans really wanted to spend less, they control the govt, they could just spend less. When they finally decide to fix the deficit, they'll do it the way Reagan and Bush snr did - by raising taxes.

Posted by Icehawk : 8/24/2005 11:10:00 AM

Actually, the upper-income tax cuts in the U.S.A. resulted in an increase in real tax take, as rich people spent less time obfuscating their income and assets.

IOW, drop the cost of tax below the cost of hiding income and you take more tax.

But all of this is a side issue anyway.

This election is devolving into a fucking bidding war, with people voting on the likely effect on their disposable income over the next 3 years, without considering the long-term ramifications of their choices.

Sickening really.

Posted by Duncan Bayne : 8/24/2005 03:26:00 PM

> IOW, drop the cost of tax below the cost of hiding income and you take more tax.

The cost of hiding tax is pretty low. It is a good strategy for anyone paying even a pretty minimal amount of tax to look into avoiding it. It is implausible you could drop tax so close to zero that a very rich person would not get ROI from tax avoidance UNLESS you did it by simplifying the system and making punishments much more severe.
I suggest very liberal use of penalties would make richer and generally more risk adverse people fall into line and pay their tax.

> This election is devolving into a fucking bidding war.


Posted by Genius : 8/24/2005 08:34:00 PM