Posts by Christopher Worthington
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For point of comparison, National's income tax structure from last election (15% to 12,500; 19% to 50,000; 33% to 100,000; 39% to 100,000+) would cost $2.6bn if implemented today. On the average wage ($46,000) this would be $150/month.
Labour's already hinted at $1.5bn for its tax cut package, I think most people would be surprised if that number wasn't higher by the election (as was the case with WFF), the most recent fiscal accounts had a lot of headroom built into the debt track.
It seems safe to assume National will offer larger tax cuts than Labour, in which case I find a $3-4bn package believable, especially if spread over three years.
So I actually find it plausible that the Nat package will be in the region of what Key's "throwaway" remarks implied.
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His statements have a plain and clear meaning, and so that's what I go for
Well, having just listened to the interview, Key introduced his statement by referring to "the average income earner" being $200 better off, which would seem to specifically rule out your interpretation.
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I/S's estimate isn't necessarily wrong, but obviously it's the highest possible interpretation. A $200/month tax cut could be delivered to everyone on the average wage ($46,000) for a cost of around $3.5bn. Even that is not a minimum cost, I'm assuming the Nat's overall tax cut package would be similar to what they proposed last time (which was also designed so that the biggest tax reductions, in percentage terms, peaked at about the average wage).
National have already said they are planning a multi-year tax-cut package, so you could spread that cost over three years at $1.2bn/year. That would still be a lot less than the total growth in individuals' income tax take projected for the next three years ($5.2bn).
So without the detail on exactly what Key said it's not really clear whether he's making a realistic promise or not.
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Firstly, I agree that Cullen initially targeted higher surpluses in order to implement the Cullen fund, and it is probably fair to say that the Cullen fund is a policy decision that is hard to envisage under alternative finance ministers.
Using the surpluses as a measure of fiscal conservatism tends to be misleading. Looking over the fiscal accounts, I think it is clear that Cullen views a balanced budget as a fiscal position that results in government debt remaining constant as a % of GDP. In effect, this means running a cash deficit of around $2bn (given current level of GDP and nominal growth rate). Spend any more than this on an ongoing basis and the debt ratio would start to climb.
The table below has the Budget projections for the cash position (and the debt ratio to GDP) for each of the last four budgets. The outlook at each budget was remarkably similar: Cullen intended to (substantially) reduce the cash surplus over the next few years, to the point where the cash deficit was such that the debt trend would be flat. In other words, to spend all that he could without going into deeper into debt. The fact that he didn’t succeed is due to upside surprises in revenue and hence spare cash.
Year 1 is actual, year 2 is an estimate, years 3- forecast
Budget 2004
FY 2003 2004 2005 2006 2007 2008
Cash 1217 135 -808 -1176 -1466 -1541
Debt 28 24.7 22.6 22.3 22 21.8Budget 2005
FY 2004 2005 2006 2007 2008 2009
Cash 520 2413 30 -1606 -2776 -1391
Debt 26.2 23.7 23.2 21.9 21.8 21.2Budget 2006
FY 2005 2006 2007 2008 2009 2010
Cash 3104 1755 -1468 -2110 -2706 -1101
Debt 23.2 23 21.9 21.9 20.7 19.4Budget 2007
FY 2006 2007 2008 2009 2010 2011
Cash 2985 1720 -976 -1687 -1649 -1426
Debt 22.6 23 23.3 22.5 21.3 21.8To reiterate my earlier point, these decisions to spend to the limit were made against a backdrop of excellent fiscal conditions (which allowed for strong spending growth without reducing the cash surplus) and an inflationary outlook that argued for restraint.
So, Cullen fund aside, I don’t see this as consistent with the idea that “Cullen’s political efforts ensured that the surplus was higher than it otherwise would have been… and that this effort was part of his active interventionist outlook”. In fairness, it is true that the National 2005 election fiscal strategy would have involved lower surpluses and higher debt (relative to the budget projections of the time, actual revenues have been higher than the Nat’s assumed).
In fact it would seems that the main rationale for Cullen’s recent budgets has been to put the opposition in a position where they must either increase debt or cut (intended) spending in order to implement tax cuts. There’s nothing inherently wrong with this fiscal strategy from Cullen, but it’s neither fiscally conservative nor meritorious from a Keynesian perspective.
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Keith I can’t see what basis you could have for concluding that the Cullen has a “master plan” for discretionary fiscal policy. The idea that he has been running surpluses for seven years in anticipation of a looming economic crisis is nonsensical.
Fiscal policy under Cullen has had two distinct periods. In the early years, the government was making a concerted effort to increase the surpluses in order to implement the New Zealand Superannuation (“Cullen”) Fund. But in the later years, the government has found itself with surpluses much larger than required. This was not a policy decision; this was a direct consequence of Treasury underestimating revenue. The high surplus era is an accident of history.
If we ignore Cullen’s rhetoric and look at the Budget projections from 2005 onwards (the cash balance in particular), it is clear that the government has always intended to reduce the surplus (and dish out a massive fiscal stimulus), even as it paid lip-service to inflation warnings from the Reserve Bank. It is only continued revenue surprises that have frustrated the government’s plans (and averted the stimulus).
It is perhaps fair to characterise Cullen as a conservative finance minister, in the sense that he’s targeted fiscal surpluses (in addition to the Cullen fund), and used revenue surprises to permanently pay off debt. But in both these respects he was effectively continuing the policy preferences of the National finance ministers who preceded him. And the exceptional revenue growth over his tenure has meant that no trade-off was required between maintaining rapid rates of spending growth (by historical standards) and running large surpluses. Even on the spending side, Cullen’s conservatism is overrated: the easing budgetary pressures from falling social welfare and debt-servicing expenditure (as a share of GDP) left plenty of room to increase discretionary spending.
But to return to your main point, you don’t need to be running constant fiscal surpluses to be able to provide a fiscal stimulus. The standard fiscal target is a budget that is balanced over the economic cycle, not surpluses large enough to ensure that you remain in surplus all the way through the economic cycle.
And to put the potential fiscal stimulus required in perspective, the US (with real economic problems) just enacted a one-off stimulus of 1% of GDP. The government’s projected fiscal stimulus for the 2008 and 2009 June years (as per the HYEFU) is already around 1% of GDP per year already, despite Treasury forecasting completely normal GDP growth over this period.
Nor is it the case that fiscal stimulus is or would be good economic policy (with the exception of the automatic stabilisers, unemployment benefits and the like). Conventional thinking still puts fiscal policy as a last line of defence required only if monetary policy has failed (or seems likely to be ineffective).
Fiscal spending is slow to enact, which makes it a very clumsy method of boosting the economy. If Cullen waited until we definitely “needed” fiscal stimulus, it would tend to be too late; if the stimulus is provided early and the recession doesn’t eventuate, it’s hard to take the spending back and, as you say, you’d have an inflation problem. And most government spending programmes created with the intent of providing stimulus tend to be poorly suited for the task (e.g. road-building etc). If you want stimulus, giving out the cash directly (via tax cuts/rebates and increased welfare payments) is probably the best way to do it, even though there will inevitably be some leakage to savings.
Keith, if you have evidence that Cullen is an avowed Keynesian who believes that discretionary fiscal expenditure should play an important part of economic stabilisation policy, I’d be interested in hearing it. Otherwise I’d regard the idea of fiscal stimulus as a convenient canard that allows the government to again justify doing what it has been planning to do for four years now.
Having said all that, I am no problem with the government reducing the surpluses from an inflationary perspective. Pages 6 and 7 of the most recent Reserve Bank monetary policy statement give a good overview of how the Reserve Bank responds to fiscal policy. The key point is that a decrease in government savings (ie fiscal stimulus), whether expenditure or tax cuts, would require a transition period (not permanent) of higher interest rates to increase private savings. In a miracle world the reduction in government savings would be timed to coincide with an endogenous increase in private savings (as you’d expect in a recession) thus eliminating the need for higher interest rates. In reality, this timing is nigh on impossible. If we accept that the government is running structural surpluses that exceed requirements (since there is no debt left on a net basis), then a transition period of higher spending and higher interest rates becomes inevitable.