Thursday, May 18, 2006



Budget Day

It's Budget Day, and despite the pressure from the rich and the business community, they won't be getting tax cuts. Instead, the government's reported $9 billion surplus will be spent on schools, hospitals, roads, and the Cullen fund - invested for the benefit of all New Zealanders rather than just the few.

With a slowing economy and rising inflation, tax cuts would be madness now anyway, running the risk of pushing up interest rates while leaving the government severely out of pocket. They're already running cash deficits; the "surplus" is primarily due to investment being greater than depreciation, rather than a pot of cash lying around waiting to be spent. But the right has backed itself into an ideological corner of having to call for tax cuts no matter what, regardless of need, utility, or even whether they're actually able to pay for them. And so they trot out the same misleading arguments that the government is taking more off people (it isn't) and that we are being "overtaxed". But we're not, either by international standards, or by the only one that matters: whether taxation revenue is sufficient to meet the spending demands made by the electorate. And if anything, the latter suggests that we are being undertaxed...

The flip side of this of course is that the government has to actually deliver on those spending demands. And bluntly, we do not elect Labour governments to order that people be dumped off waiting lists and then blame DHBs or tell people to get private cover. While the past few years have done wonders for primary care and done a little to stem the haemorrhage of medical staff to higher paying jobs overseas, there's still the fundamental problem of resourcing. And the dirty secret behind hospital waiting lists is that they exist entirely because of deliberate central government underfunding. Every year the government "purchases" medical services from the DHBs: so many heart transplants, so many hip ops, so much for mental health etc - and the DHB administers how this money is spent. The waiting list is the difference between the amount the government purchases, and public demand (or rather, need - and I defy anyone to say that people with dodgy hips do not need them replaced, or people with kidney stones do not need them removed). Fixing this problem will require substantial long-term spending commitments and a lot of hard work, and this isn't the year for it (the money for this year's budget having already been promised for other things, like extra police, interest-free student loans, and Working For Families)- but if the government really wants to have an "investment budget", perhaps they should start seriously investing in our health system, rather than allowing the decay which began under National to continue.

10 comments:

Do you actually understand economics?
You say that tax cuts will lead to further rises in interest rates, you don't think Govt spending will do that?

Posted by pinkliberal : 5/18/2006 10:43:00 AM

I/S, What do you think would happen if all the wealthy people left New Zealand?

Posted by Anonymous : 5/18/2006 10:46:00 AM

You have also ignored price from the equation - if it's free people will demand more.

Posted by Anonymous : 5/18/2006 10:53:00 AM

I think we'd all be better off if the rich buggered off. They take more than they give.

Posted by Anonymous : 5/18/2006 11:01:00 AM

Pink: No, I don't - or at least not nearly as much. Tax cuts go directly on consumption, which drives interest rates through the roof (as Australia is about to find out). Government investment in roads, schools and hospitals doesn't have nearly the same effect.

Posted by Idiot/Savant : 5/18/2006 11:05:00 AM

Anon: then they'll either continue to pay taxes on any wealth generated by assets left behind, or sell those assets to someone who will in turn pay taxes on the wealth generated. And if they don't sell and prefer to leave their assets lying idle, then someone else will eventually move into the vacant economic niche, and generate wealth and pay taxes in their place.

But I suspect the most noticable effect would be that we wouldn't have to put up with their incessant whining that public services be sacrificed for their private profit...

Posted by Idiot/Savant : 5/18/2006 11:06:00 AM

anon,

I doubt people will demand more hip replacements just because they are free.

If you want to use Supply/Demand equations then pay close attention to non-linear elasticity.

Posted by Icehawk : 5/18/2006 11:48:00 AM

To echo icehawk, this is not "demand" - it is need. It is pain and suffering, which is precisely what we have a public health system to reduce.

Posted by Idiot/Savant : 5/18/2006 11:54:00 AM

"Tax cuts go directly on consumption... Government investment in roads, schools and hospitals doesn't have nearly the same effect"

I think you overstate it.

A cash deficit means cash being pumped into the economy - by paying more money to builders, road-builders, more police, teachers, doctors, etc. That extra cash will increase consumption and put upward pressure on wages (and hence prices). Whether or not there's a current account surplus is neither here nor there.

There are studies showing that the effect on consumption of such spending is less than for tax cuts. But the biggest factor is the size of the cash deficit/cash surplus, not whether it's being achieved via changes to govt spending or to tax levels.

At a time when the Reserve Bank is trying to reduce the amount of cash in the economy (by raising interest rates, which discourages borrowing and encourages saving), it is unfortunate to have our govt moving to running a larger cash deficit.

Looking at the current interest rate curves, the market thinks it'd be better to wait 18 months. But it's very hard to get monetary and fiscal policy that well in synch because govt spending can't just be turned on and off like a tap - as the police are finding with their recruitment issues.

Posted by Icehawk : 5/18/2006 12:25:00 PM

NZers on the lowest incomes are over-taxed. Losing 15-19.5% of income under $20,000, plus another 1% to ACC. (And then an eighth of whatever's left over to GST).

Compare with the 0% tax rate for the lowest income earners in Australia and Canada. Canada also has a GST rebate for low income earners. So their net tax paid is minimal (a couple of percent may be lost through various compulsory insurance & pension plans, etc.)

Cutting the lowest rate would be, surely, "for the benefit of all New Zealanders rather than just the few."

And in addition it would have the welcome effect of reducing the attractiveness of National's claims.

Posted by dc_red : 5/18/2006 12:37:00 PM