The calm before the Budget

Thursday is Budget Day, so the news today is thin, mostly tied up with speculation on what sort of savings incentives Cullen will deliver and the pepetual wailing and gnashing of teeth over the absence of tax cuts for the rich (you'd think that after seven and a half years, our political journalists would have twigged to this being something that social democratic governments generally aren't in favour of - but apparently not). Well, that and Ian Wishart's latest bucket of sewage, which everyone to their credit is doing their best to avoid stepping in.

Thanks to Michael Cullen's good work over the last seven years, the Budget is likely to show OBERAC surpluses stretching out as far as the eye can see. This is likely to provoke the usual demands from the right for that money to be "returned to the hard working taxpayer" in the form of tax cuts. Writing in The Listener, Brian Easton is rather acerbic about such demands:

This savings-before-investment figure is an accounting notion, frequently referred to as “The Budget Surplus”, even though almost all of it has been spent.

Treating the amount as available for tax cuts (or for more government spending) confuses an accounting aggregate with an economic reality. It was a monetarist confusion that seemed to lead the National Party during the 2005 election to propose using this “surplus” for income tax cuts. Had the policy been implemented, the cuts would have fed into household consumption, reduced national saving, and so pushed the exchange rate up further, screwing even more exporters and ruining the economy even further.

Fortunately, wiser – or at least more economically informed – heads seem to have since prevailed in National.

But even with a more responsible approach, the large apparent Budget “surplus” (before investment and such spending) is politically unstable: there will always be those who, from economic ignorance or political opportunism, argue that this money – which we haven’t got – should be given away in tax cuts. The danger is that enough of the public may believe the ill-informed to drive an irresponsible economic policy – as almost happened in 2005.

Savings incentives are a political way aroud this, a way of cutting taxes without really cutting taxes, defusing some of the political demand without causing inflation (and while directing it towards social democratic aims to boot). But they don't deal with the underlying problem: that there are people out there too thick to realise that the "budget surplus" isn't, a view encouraged by people who think that it is appropriate to run the country in the same way that National's cronies ran Tranz Rail. The only way of dealing with this is to make it clear what the "surplus" is spent on - roads, schools, hospitals, and pensions - and that the sort of asset-stripping tax cuts promoted by the extreme right for their own benefit would come at the expense of the social and physical infrastructure the vast majority of New Zealanders depend on to live.