Tuesday, June 24, 2008

Easton on tax cuts

In his Listener column this week, Brian Easton points out the basic truth about tax cuts: they cost money:

The other side of taxation is government spending. Reducing tax levels means government outlays have to be reduced too, if not immediately then eventually when the borrowing is repaid.

So when someone says, “We should cut taxes,” they are also saying, “We should cut government spending.” If they are saying, “We should get tax cuts from the increase in government revenue coming from the growth of the economy,” they are also saying, “We should restrain government spending.”

But is this what New Zealanders want? Unfortunately, the parties promoting tax cuts don't make the choice explicit - they work hard to pretend that they can cut taxes without any reduction or restraint in government spending, or that they can make savings by reducing "waste" - something Easton is rightly suspicious of:
It is easy to promise to cut “wasteful” public spending when in opposition. But ask any cabinet minister and, irrespective of the party, he or she will say it is very difficult in government. There is a constant- political clamour to spend more, even when it may not be effective. Trying to cut waste is like trying to get the fat out of a quality beefsteak: it is stippled through the meat and eliminating it usually damages the beef. The capacity of a department or a section to deliver services can be undermined, with worse service to the public or poorer service to ministers.
This is exactly what happened during the 90's: deep cuts to the public service led to an overall reduction in its capacity, and to government departments routinely hiring consultants at inflated prices to perform their core functions. National supported it because it was "efficient" (which says everything that needs to be said about their vision of "efficiency"), and because it was their mates getting rich off this transfer of public money. And it ought to be concerning that their front bench is still stacked with radicals from that era.

Of course, as Easton points out, there's another option: cut programmes. But that as Easton points out, that has consequences of its own.

What do New Zealanders think if the choice is made explicit? A poll last year showed that New Zealanders didn't actually want tax cuts, and that's backed up by further research from the PSA and UMR research today. According to their poll, 60% of New Zealanders oppose larger tax cuts, and 71% oppose tax cuts if they result in higher user charges for health and education (full details here [PDF]). But tax cuts (especially for the rich) are popular amongst National's tiny clique of ultra-wealthy donors, so I suspect we'll be hearing more about them regardless.