Tuesday, July 19, 2005

Borrowing for tax-cuts

Today's piece in the Herald on National's tax plans finally made it clear how they are planning to pay for their tax cuts: they're going to borrow:

[John Key] was confident a review of spending across departments would throw up enough waste and duplication to help fund cuts. The other ways the cuts would be funded are:* A lower oberac surplus (operating balance before revaluations and accounting changes) than Labour's.* Borrowing more to finance some capital items like roads and possibly student loans.

Just to make this clear, the OBERAC (operating balance excluding revaluation and accounting changes) effectively tracks the level of investment in our society. Currently most of that "surplus" is being spent on things like schools and hospitals and roads, or stashed away in the Cullen fund so we can pay for people's pensions in the future. "A lower OBERAC surplus" means not doing some or all of this. It means running down our infrastructure. Given National's stated commitment to roads, this means that it will most likely be our schools and hospitals which will bear the cost - schools and hospitals which still have not recovered from a similar run-down under National in the 90's.

As for outright borrowing, the fiscal irresponsibility of this is simply breathtaking. We've spent the last twenty years clawing our way up from the effects of Muldoon's borrowing binge. We've spent the last six recovering from the effects of the policies intended to end it. As Brian Easton pointed out last week, it is extremely difficult to get off this wagon once you have got on it (see that twenty-year process above). The compounding cost of debt servicing can very quickly cause a blowout, especially if the economy goes sour - as it is expected to next year.

Then there are the equity issues of who pays. Borrowing creates a burden on future generations (as does running down infrastructure). This is one thing when they receive a valuable asset in return. But what National is proposing is borrowing to fund consumption, the equivalent of maxing out the credit card to pay for a self-indulgent shopping spree. There will be nothing to show for it, and the next generation of New Zealanders will be left to pick up the tab and clean up the mess. Meanwhile, the people who will benefit - the rich - will be laughing all the way to the bank...

This is not the plan of responsible economic managers. Instead, its the "spend today, pay later" promise of a party desperate to get elected no matter what the cost. It is irresponsible and unsustainable, and we should reject it.


What sticks in my craw the most is all the upper-middle class voters who first bankrupt themselves with consumer debt and huge mortgage fulled spend ups, then plan to save themselves by bankrupting the country will next all be moving to Queensland bitching about how New Zealand has let them down.

Posted by Anonymous : 7/19/2005 12:11:00 PM

I thought your comments on tax policy were a little polarised. For instance, the statement that National proposes borrowing for consumption contains the assumption that tax surpluses returned to me would be used on consumption ("maxing out the credit card"). I might choose to use it for investment, to grow my assets, increase productivity and prepare for the future. Why not give me the choice?

Also relevant is the smoke-and-mirrors debate about whether there really is a surplus, and how big this putative money pot might be. I'm no expert, but it strikes me a significant that Michael Cullen diverts a $500 million bank tax windfall into some new fund for roads. No debate, no strategic plan. It certainly LOOKS like he has has an embarrassment of riches.

The heart of it is a debate about how much money the government should sequester. A lot of people who are generally content with Labour's performance are irritated by the way they have allowed bracket creep to increase the tax take by stealth. The 39% bracket was sold to us in 1999 as applying to a tiny minority. By showing the greatest reluctance to adjust brackets over the years, Labour has signalled that it has a philosophy of ratcheting up the tax take. How is that police officers, skilled factory workers and other ordinary Kiwis now find themselves in the top bracket? Their living costs, house prices and mortgages have gone up along with their earnings, but Labour treats this as a distraction from its fiscal master plan.

I think the government missed a trick by not acknowledging this process, and National has seized the initiative as a result. Let the debate continue!

Posted by Anonymous : 7/19/2005 12:21:00 PM

Anon: Given that that is exactly how tax cuts have been spent in the past, I think its a fair assumption to make. Especially when you consider that the driving impetus behind the call for tax cuts is existing overconsumption.

But I was actually talking in terms of government spending. National is proposing tax cuts without any corresponding cuts in spending - which means that they will be borrowing for government consumption, and making the next generation pay for resources consumed by this one. if they proposed spending cuts, then there would at least be intergenerational equity - but then, people today might decide that they value their free doctor's visits and free education more than a tax cut.

I agree that labour was stingy on the bracket change and did not sell it well. it should have been done ASAP and presented as a way of bringing fairness and honesty to the tax system - not grudgingly sold as a far-off "tax cut". And this is what has given National the lead...

Posted by Idiot/Savant : 7/19/2005 01:49:00 PM

Just like the Bush tax cuts, this plan is a back door way of bringing about unpopular government spending cuts. If you don't accept a broad role for government in society, what better way is there of reining it in than putting it deep into debt.

Posted by Anonymous : 7/19/2005 04:39:00 PM

Agree - funding tax cuts by borrowing just doesn't make sense unless its tied to some ulterior motive such as you suggest. Heavy debt also provides a tidy justification for selling (whats left of) the family silver to repay the debts. Sound familiar?

Assets sales haven't been talked of much so far as I can tell, but I sense there is sufficient ideological fervour within National to note it as a possibility under a Brash Govt.

Posted by Anonymous : 7/19/2005 07:58:00 PM

"And this is what has given National the lead..."
Right! 10 years ago I would have thought myself rich if I was making $68,000, but not now. Most people can see tax cuts as a cheap attempt to buy them off, but this bracket creep thing has really hit a nerve.

Posted by Anonymous : 7/19/2005 08:10:00 PM

i/s - you are mallardising. making up lies. "But what National is proposing is borrowing to fund consumption". Investment in roads and schools of a long term nature is not consumption and it would be quite appropriate to borrow for a high up front cost so that the tax revenues to pay for it can be smoothed. just like a mortgage on your house. The benefits are gained over the long term. you are normally not a partisan hack. stop writing shite like that.

Posted by sagenz : 7/22/2005 07:48:00 PM