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Budget 2008: Analysis

Written By: - Date published: 3:00 pm, May 22nd, 2008 - 67 comments
Categories: budget 2008, election 2008 - Tags:

The tax cuts are smaller up front than Labour had been hoping to deliver but the economic position at present means there is simply not the money in the coffers to give huge cuts right now. Labour is bringing forward the cuts and the boost to Working for Families to October 1, instead of April 1 which would be the usual date, and targeting money at lower income families first. The cuts in following years will be larger than most expected and will spread the benefits into upper middle income levels ($50K plus), with the tax bill for someone on $50,000 reducing 15% by 2011.

Labour’s broadband plan is much more sophisticated than National’s and will actually work in delivering better internet without putting Telecom back into a monopoly position. It doesn’t aim to build in record time a network massive bandwidth that most people have no use for. Instead, it takes a more prudent and cost-effective approach to gradually increase broadband speeds. Sure, National’s investment figure is bigger but there is a vacuum behind it, as if the plan was made up on day and Key plucked the$1.5 billion figure from the air. It was good to see that Labour’s plan specifically includes money for a new trans-Tasman cable, for which the government will be anchor tenant. It’s all very well having lightening fact connections in New Zealand but not much good if the data can’t get overseas. The Labour plan also targets those who have most use for faster broadband, businesses.

The tax cuts and the global economic slowdown mean the fiscal position of the Government will be much tighter in the coming years than it has been in the last few budgets. The operating deficit will be down to a couple of percent of GDP. Government debt will remain stable at around 18% of GDP over the next three years. Labour is not increasing debt to pay for tax cuts but rather than decrease debt further it is giving tax cuts. By phasing the cuts in over three years, the inflationary impact from them is reduced. Inflation is expected to fall under 3% in the medium term. That’s the Reserve target, so interest rates can be expected within the nest few months.

This means there is little free room, only about $1.7 billion, for spending or tax cuts promises heading into the election without going into an operating deficit (that is, borrowing to fund day to day spending, rather than borrowing for investment). Which sets us up for an interesting election: where will the money come from for both major parties to offer vote-grabbing policies, and what will be left for policy concessions to minor parties in governing deals?

As we predicted, this budget leaves National in a bind. If they offer larger tax cuts than Labour, it will have to increase borrowing or cut spending. It also eliminates the over-taxation argument. There was this weird perception that Cullen was sitting on a huge pile of gold at the end of each year, when, in fact, the operating surpluses were being used to fund capital investment and pay-down debt. Now, Labour has delivered tax cuts and kept debt levels steady. It has already meant less new social spending than Labour would probably have liked.

It now comes down to a simple choice for voters: reasonable tax cuts, not more government debt, and moderate increases in government spending or large tax cuts (mostly for the rich, no doubt), more government debt, and less spending on public services.

67 comments on “Budget 2008: Analysis”

  1. IrishBill 1

    Hey Steve, good stuff. I see Key is already paving the way for tax cuts for the rich by talking about them as creating an incentive for people to become wealthier. Other than that Spin bingo was pretty much dead right.

    Good budget I thought. I would have liked to see the tax cuts limited to bracket-creep only but it’s good to see some serious and sensible investment. I’m not as sure as you about the contestable fund for broadband (it smells a little bit like “let the market decide”) and I would have liked to see benefits increased.

  2. T-rex 2

    Just read the summary – Good on Cullen for actually acting like the minister of finance for a responsible government, rather than digging the nation into a hole for the sake of playing father christmas for the next 12 months.

    Yes Bill English, I’m looking at you.

  3. randal 3

    randal is yer avridge kiwi joker and it sounded pretty good to me

  4. erikter 4

    “The tax cuts are smaller up front than Labour had been hoping to deliver but the economic position at present means there is simply not the money in the coffers to give huge cuts right now.”

    Following your logic, SP, why didn’t Labour offer tax cuts given the massive surpluses of the last few years? Why now and not then?

    And the Nobel Prize of Cynicism and Disregard for the NZ Public goes to …… Michael Cullen.

  5. Matthew Pilott 5

    Following your logic, SP, why didn’t Labour offer tax cuts given the massive surpluses of the last few years? Why now and not then?

    erikter, did you read the bit where massive surpluses were spent on paying debt? I guess not.

  6. Because reducing debt, and saving for the future in previous budgets – it’s about balance, eh?

  7. $12 bucks a week!!!

    I hope Aunty Helen is enjoying her last few days on the job.

  8. Opps I mean months.

  9. gobsmacked 9

    I’m happy with the budget. I don’t believe in the media myth of “circuit-breaker” – nothing Cullen could have said today would have sent Labour zooming up the polls – not even “I resign”! 😉 But it does force National to copy or cut, and so a real debate can start.

    The budget delivers in many of the right areas, and if Labour do lose the election, National can either keep what Labour have delivered, or get dumped out after one fractious term and at least one change of leader. (Hey, I’m almost looking forward to seeing them do it – it’ll be quite a show).

  10. chris 10

    I’m assuming that you Brett Dale are going to be better off by $12 a week which means you’re earning less than 30k p/a.If that’s the case you’ve got me wondering, WTF do you support the Tories?.

  11. Occasional Observer 11

    Nobody believes Labour will deliver them.

    Nine years of no tax cuts, and only now Cullen begrudgingly offers this paltry, measly, sum.

    Labour doesn’t trust New Zealanders with their own money. Their tax cut plans have no credibility.

    This budget feels very much like the one that David Caygill delivered in 1990: remember the $89 million surplus which turned into a multi-billion dollar deficit?

    National will be left to bring some responsible fiscal management back to New Zealand.

    Good on you all, at the Standard, for risking your own credibility as well, though. After months and months of saying tax cuts were bad, you’re doing an excellent about-face of heralding them now. Yes, yes, we get the message, Steve. Labour good, National bad.

    For a guy who doesn’t support the Labour Party, Steve, you’re putting an outstanding effort into confusing us.

  12. OO. The tax cuts are going to be passed into law this evening. National will vote against it.

    We’ve never said tax cuts are bad, we’ve said there are responsible tax cuts, sustainable ones that don’t cut spending or necessitate borrowing, that help out those in need, and bad tax cuts, ones that need to be funded through spending cuts or borrowing and go mainy to the rich.

  13. Chris:

    Because I believe in choice and personal responsibility.

    I believe that if ya have extra cash at the end of your pay cheque, you should invest it, and not spend it on booze, cigarettes or at the TAB, unlike those on the left.

  14. Steve Pierson:

    Perhaps Tax cuts should not only be for those who are in need, but for those who actually work.

  15. IrishBill 15

    I’ve said tax-cuts are bad and I stand by that. See my first comment.

  16. gobsmacked 16

    “I believe that if ya have extra cash at the end of your pay cheque, you should invest it, and not spend it on booze, cigarettes or at the TAB”

    Nanny State!

  17. chris 17

    So Brett, you think that because I’ve always supported the Labour movement I piss my money away on drink, fags and gambling.
    I guess you must be a Tory but on 30k p/a I doubt you’d be of the “born to rule” variety.

  18. Matthew Pilott 18

    I believe that if ya have extra cash at the end of your pay cheque, you should invest it, and not spend it on booze, cigarettes or at the TAB, unlike those on the left.

    Now you’re not entirely stupid Brett, why do you get these urges to lash out like a filthy bigot every now and then?

  19. erikter 19

    SP would make Houdini and any contortionist proud.

    After endless ranting about odious tax cuts, he’s now found they come in two flavours: “good” and “bad”. Of course, the ones promised by Cullen are “good”.

    They are just absurd statements from a Labour apologist.

  20. Matthew Pilott 20

    Occasional Observer – people don’t fall for NP spin as easily as you presumably do.

    National will be left to bring some responsible fiscal management back to New Zealand.

    Debt-funded tax cuts eh? Whoopeee! You speak with some certainty about a party with no policy – I find your blind faith almost touching, though vaguely lemmingesque, OO.

  21. Matthew Pilott:

    How is my comment bigoted?

    Dont you agree that a high percentage of people on very low wages or benefits, drink, gamble and smoke and go to KFC?

    Did I mention someone’s race/gender/religion/culture????

    Please tell me.

  22. Matthew Pilott 22

    Don’t be daft Brett.

    You tell me how it is you came to the conclusion that “the left” wants poor people to spend money on diggers, turps and gambling. And KFC, so it seems.

  23. Would you agree people who are on a low wage,are more likely to vote Labour than National?

    Would you also agree, that people on a low wage tend to drink and smoke and play the pokies more???

    Do you also agree that a lot of poorer people have a poor diet, eg: KFC and McDonald’s.

    Anyway, whats the difference between a bigot and a filthy bigot?

  24. Felix 24

    Brett

    If you look closely you can see it around the eyes.

    Peter Brown – garden variety bigot.
    Pauline Hanson – filthy bigot.

  25. Matthew Pilott 25

    Brett, that has nothing to do with whether the left wants people to spend their money on vices. I’m part of ‘the left’ by any general definition, and I don’t want people to spend all their money on crap that’s bad for them – so where did you get the idea that that is what ‘the left’ wants?

    I guess the difference is that I was feeling grumpy in general (read: ill and sore), on top of being annoyed at your comment.

  26. I didnt say the left wants people to spend money on their vices.

    I said:

    I believe that if ya have extra cash at the end of your pay cheque, you should invest it, and not spend it on booze, cigarettes or at the TAB, unlike those on the left.

    I personally believe if you have extras cash, YOU should invest it, but a lot of poorer people spend their extra cash on the above mention things, and people who are poorer tend to vote Labour.

    I am not suggesting that LABOUR wants people to spend their money on this, quite the opposite in fact.

  27. Steve 27

    What with the exodus to Australia (surely only going to continue unabated now) and the retirement (rich pricks)of baby boomers what happens when the number of people reliant on the state and on various arrays of govt benefits and handouts and middle class assistance paid for by other people out number the amount of people working for a living and funding these measures? Is there a tipping point? Do they just raise taxes accordingly in another couple of years? Is that what the global warming thing and its associated taxes is really about?

    For example – This WFF thing makes me sick. Why should I as a single person fund other people’s lives just to have families? At the very least couples who want to have children but can’t should be compensated by the state as they miss out, if we’re going down that road.

    I just think the govt and the reliance of them that they create needs to be reined in big time. For a start why 120 + mps for a country of 4 million? Why twenty something indvidual health boards and countless councils, departments, commisisions? You’d think NZ was an empire not a small country.

    The indians only need about a few chiefs, not about 10,000 of them.

  28. Vanilla Eis 28

    Steve: Those kids qualifying their parents for WFF will be the ones paying your Super in 40 years, so I wouldn’t begrudge them too much just now.

    As for the number of MP’s, every Political Science lecturer I’ve talked to seems to think that proportionately we’re under-represented, especially when you consider countries such as the United States and Australia. We don’t have both State and Federal Governments, but feel free to move there and moan about politician numbers if you wish.

  29. Policy Parrot 29

    “I didnt say the left wants people to spend money on their vices.

    I said:

    I believe that if ya have extra cash at the end of your pay cheque, you should invest it, and not spend it on booze, cigarettes or at the TAB, unlike those on the left.

    I personally believe if you have extras cash, YOU should invest it, but a lot of poorer people spend their extra cash on the above mention things, and people who are poorer tend to vote Labour.

    I am not suggesting that LABOUR wants people to spend their money on this, quite the opposite in fact.”

    I guess that would be your excuse to give the poor nothing then, eh Brett?

  30. pinetree 30

    “The tax cuts are going to be passed into law this evening. National will vote against it…..”

    Really? I’d have thought they have pout themselves in a space where they’d have to vote for it….there’s enough hypocrisy floating around as it is without that little farce…

    Not a bad budget I thought, it’s never going to be entirely to my way of thinking, but not much to quibble on the direction of the spend – I’m broadly happy with where it goes (my priorities are a little different, but that’s a tory/left thing), but I’m always keen to see that the execution/implementation is the best that it can be…

    …but sometimes I do feel that the weight (or true potential) of a dollar is not really felt in the right places….opportunity cost and all that….

    We’ll see what key comes up with……whenever that is….I’m growing impatient, if for no other reason to have something decent to debate with you guys !

  31. gobsmacked 31

    Key has announced National’s economic policy. He did it tonight on Campbell Live, and again on Close-Up. He was pressed by both the interviewers to reveal details, and finally, he did. And National’s policy is …

    *drum roll*

    They’re going to close the embassy in Sweden.

    I am not making this up. You couldn’t.

  32. But I wanted to be the Ambassador to Sweden! The fu*kr’s just lost my vote…

  33. Might as well as close the Swedish embassy, we dont do much business with them.

    If any labour supporter thinks that is national’s main policy then you better grow up.

    Wait until the announcement comes, Aunty Helen’s 12 bucks is going to be nothing.

  34. POLICY PARROT:

    I would give the poor a better education, one where you learn about business and budgeting and the real world, not PC teachings.

    I would give the poor, those on low incomes like myself, a bigger tax cut, and tell them, its your money you choose to do what you like it with it, its your choice.

    I would cut GST and make lower the petrol tax.

  35. DS 35

    “For a start why 120 + mps for a country of 4 million? Why twenty something indvidual health boards and countless councils, departments, commisisions? You’d think NZ was an empire not a small country.”

    The US state of New Hampshire has a state legislature where the lower house has 400 members. New Hampshire has about 1.2 million people, so if New Zealand had the same level of representation, we’d have over 1300 MPs.

    New Zealand, with a mere 120 MPs, is hardly overrepresented.

  36. pinetree 36

    “It was good to see that Labour?s plan specifically includes money for a new trans-Tasman cable…”

    Just out of interest….that wouldn’t be the Kordia link would it….if so then I hope the $15m (?) is not just underwritten SoE capex….

    Still, nice to break the Sthn X “monopoly”, as I believe Telstra is whacking a whopping great big piece of glass Sydney to Hawaii….

  37. Lew 37

    From what I can stomach of the KB comment thread and those comments above, i see a few common arguments from those who don’t like these tax cuts. Here are three, there are probably more:

    1. `Too much, and yet simultaneously not enough’. This one seems logically indefensible unless you presume that what people really mean is `not targetted at me’.

    2. `There is a billion dollars per year worth of fat in the public service which can be cut without significant adverse impacts on taxpayers’. Leaving aside the fact that John Key has said he’d cap the core public service rather than cut it, taking this as given without due diligence is an incredibly risky platform upon which to base policy.

    3. `Cullen doesn’t believe it’, aka `Cullen is being hypocritical’. So what? The legislation will be passed by the time you get up tomorrow morning. If it’s really policy you care about, well, here’s some policy for you. This one is a masked `I don’t like Cullen and I won’t like him no matter what he does.’ A fair and reasonable standpoint, but only if people declare it as such.

    L

  38. National disgrace 38

    Brett, closing the embassy may not be National’s main policy, but it’s the only one he was able to articulate when questioned on both current affairs shows tonight. He’s so impressive.

  39. gobsmacked 39

    National Disgrace is right. It’s not my job to think up policies for John Key. It’s his job to tell us HIS policies. He wants to be Prime Minister. He was asked for policy, and closing the embassy in Sweden was his reply (a fact that you have not disputed, Brett, because he said it).

    Since he used exactly the same line on both programmes, that was clearly the prepared message that he wanted to get across. Bigger tax cuts, one less embassy. (Must be a feckin huge embassy …)

    Brett, if you don’t like Key’s answers, tell him, not us.

  40. ak 40

    The Swedish embassy is this years “hip-hop tours” without the veiled racism. Brash-lite.

    Like the thousands of useless “health bureaucrats” twiddling their thumbs through $5 billion a year, Slippery is about to find his mythological demons a little hard to deliver on a plate – particularly with so many already “me-tooed” off the menu.

    The inherent contradiction of running simultaneous “Corrupt! Corrupt!”, “NZ Sucks” and “We’ll do the Same” campaigns is coming back to bite their tight, shiny wee tooshes.

    Honeymoon’s over, smiling assassin, and them good ol’ EFA blues are a-crooning: you can’t buy my love no more.

  41. If you guys really think all we will here from key is about the Swedish embassy, well your sadly mistaken.

    It wasnt the time or place for Key to go through his policies, but when he does, the country will sit up and take notice.

  42. Lew 42

    There’s poetry on this comment thread. Not good poetry, but real love has gone into it.

    L

  43. outofbed 43

    Anyone else hear Keys budget reply speech comments, about not being interested in Vietnam or the Sprinkbok tour?
    And Clark’s later put down ? Loved it

  44. erikter 44

    “But I wanted to be the Ambassador to Sweden!”

    Don’t worry robinson, we’ll send you to Somalia, instead.

  45. T-Rex 45

    Brett, you make my brain sad.

  46. randal 46

    listen to the crap leighton smith is pushing out on newstalk zb this morning…will somebody please buy him a ticket out of here

  47. Lew 47

    randal: He actually said he’d leave of his own accord: “If you don’t throw this lot out on their collective arses, then I’m leaving the country”.

    L

  48. Pascal's bookie 48

    “If you don’t throw this lot out on their collective arses, then I’m leaving the country’.

    Labour should put that on a billboard with his picture.

  49. National disgrace 49

    You’re right Brett, if John Key did announce an actual policy, I would indeed sit up and take notice! I’d be shocked. His ‘peek a boo” wait and see is not cute, or credible any more. Pathetic. He’s history.
    I note interest rates have shot up already in response to the ‘miserable block of cheese’. Imagine how much your mortgage will go up if Key pledges to borrow and splash three times as much.

  50. erikter 50

    Don’t you worry about Leighton Smith.

    He will remain in the country because his prediction will come to pass: Labour will be soundly defeated at the polls!

  51. Matthew Pilott 51

    I believe that if ya have extra cash at the end of your pay cheque, you should invest it, and not spend it on booze, cigarettes or at the TAB, unlike those on the left.

    Generally being a cogent commentor, Brett, I’ll give you the benefit of the doubt and retract the ‘filthy bigot’ remark. I read that as a comparison of your beliefs with those on the left, not on the spending habits of the unwashed masses.

    It’s still a fairly ugly stereotype. A lot of people with more money than sense make some big gambles and hit the sauce with the best of ’em, but I truly can’t be bothered rehashing a debate on worthless stereotypes.

    You just sound more nanny-state than the incumbent when you make such a statement: “don’t give them money, they’ll just fritter it away. Tsk tsk.”

    For example – This WFF thing makes me sick. Why should I as a single person fund other people’s lives just to have families?

    Steve gets gastronomically discombobulated over WFF. Steve, WFF being a tax rebate, families are getting more of their own tax take back. If you’re going to blow chunks over something, it pays to be sure you know what you’re talking about.

    Erikter, you’re the one who wants fully privatised healthcare and education – I daresay the state doesn’t do much public provisioning in Somalia, I think you’d be far happier in your small-governmental utopia than ‘sod – I don’t think he minds paying taxes for a decent society.

    I think we’ll send you there, you’ll be so happy! Low tax, user pays, oh gosh you’ll just love it!

  52. Billy 52

    I have a question or two. In previous years since about 2004, Dr Cullen has told us that a cautious fiscal stance was necessary both as a buffer against possible future economic shocks and because too great a spending stimulus could also have placed undue pressure on monetary conditions.

    So now we have a tax cut. They cause the surplus to become very skinny indeed, leaving no further protection against economic shocks. Interest rates are still very high (in fact, higher than at any time since 2004).

    So was he lying before when he said there was no room for tax cuts? If Dr Cullen is to be consistent with the rules he has set for himself over the last nine years, isn’t the only justification for these tax cuts political?

  53. Matthew Pilott 53

    Billy, sometimes macroeconomic concerns are well over my head, but I’ll take a small punt.

    I think we’re experiencing those ‘future economic shocks’ to a small degree now – hugely increased prices have reduced spending, and enabled said tax cuts to occur. Given the change in the economic climate since 2005, it’s worng to hold what Cullen said in 2004 as relevant now. You seem to be taking Cullen’s comments ceteris paribus which is by no means the case.

  54. Billy 54

    Matthew Pilott,

    Here’s what I think. I think we could have afforded tax cuts in any of the years since 200. Cullen just didn’t want to give them because, being a socialist (or social democrat, if there is a difference) he doesn’t like tax cuts.

    Now, politically and for no other reason, he has to give them, even though by the criteria he set the conditions are much less favourable than at any time at least since 2004.

    munera accipit frequens, remittit nunquam

  55. Billy 55

    Tax cuts since the year 200 would have been nice, but I meant 2004. Must have been the influence of the Latin.

  56. RedLogix 56

    Here’s what I think. I think we could have afforded tax cuts in any of the years since 200. Cullen just didn’t want to give them because, being a socialist (or social democrat, if there is a difference) he doesn’t like tax cuts.

    And in the seven years of plenty Joseph as Pharoah’s chief minister could have cut taxes and allowed everyone to spend up large. He would have been most popular with the people.

    And in consequence during the seven years of famine, the people would have starved… and the good times would have meant nothing. This ancient story from the Old Testament pre-dates Keyensian economics by some 5000 years, but the moral of the story remains the same… self-control and restraint may not be popular, but it is ultimately life-giving.

    (Seeing as how we are indulging in history here…)

  57. Matthew Pilott 57

    Now, politically and for no other reason, he has to give them, even though by the criteria he set the conditions are much less favourable than at any time at least since 2004.

    I could just as equally say that he didn’t budget tax cuts because they weren’t needed and would have been inflationary.

    Now, as inflation on inelastic consumption has eroded our purchasing ability, Cullen comes through with the goods.

    Our two viewpoints have a lot in common Billy – they’re based upon assumptions, guesses and our opinion of the actors/agents involved.

    There’s not a lot of fact to clearly prove you’re right and I’m wrong, or vice versa; we’re talking about motivations in the end.

    To illustrate: Maybe, deep down, Cullen has been bursting at the seams (he is often bright red, to the point of vermillion, after all) to give us tax cuts, but conditions just weren’t right – and now he’s the happiest man in the land (deep down inside – on the outside he had to be somewhat begrudging to maintain the facade) because he’s had the excuse to do so.

    Redlogix: shush, we’re Godless commies Social Democrats, you’ll confuse Billy by getting biblical…

  58. Matthew Pilott 58

    What happened to the strikeout of “commies”? It looked far snazzier when that was there. Other HTML seems to work. Odd.

    [lprent: I’m not sure – it always worrks works for me.]

  59. Billy 59

    So Matthew, you reckon we would have been getting these tax cuts even if it weren’t an election year? I know it requires a guess, but what is yours?

  60. Matthew Pilott 60

    Hmm… There is always that point. Why can’t you run for PM instead of Key?

    Another guess, I couldn’t say for sure. Election or no, given every second story in the papers has been about food or petrol prices, and there’s a lot of hurt from interest rates, there would be a big incentive to act.

    If price increases have reduced discretionary spending, tax cuts aren’t going to be as inflationary so I’d say it’s much better than even odds.

    One big point though: I also think Labour are very smart operators, politically. If they wanted to give tax cuts purely for political gain, don’t you think they would have done so in the last budget, so by now we’d have had almost two months of fatter pay cheques? And perhaps another one to look forward to in April 2009 (they could have even brought that one forward to 1 Oct).

  61. Billy 61

    I would be unelectable, Matthew. I have an appalling stutter, incontinence, a twitch, a hair lip and an eye patch.

  62. Billy. Are you Nick Smith?

  63. Matthew Pilott 63

    Funny, Billy, I thought you looked rather handsome in that photo. I suppose incontinence is hard to photograph.

    Out of interest, have you seen the film Taxidermia? I think you described one of the main characters.

    [Matthew, stop trying to pick up tories on the blog. SP]

  64. Billy 64

    No, but I have just read the plot summary at IMDb. Implausably, it is:

    Gyorgy Palfi’s grotesque tale of three generations of men, including an obese speed eater, an embalmer of gigantic cats, and a man who shoots fire out of his penis.

    http://www.imdb.com/title/tt0410730/

  65. Matthew Pilott 65

    Billy, I wouldn’t recommend it to many people. You’d think with a description like that, it wouldn’t leave a lot to the imagination. It doesn’t…

    Highly recommended to a select few.

    SP – Isn’t this the new it place to be seen in? (you know that this looks like jealousy from you)

  66. Billy 66

    Well, despite the hair lip, incontinence and so on, I do look like a young Sophia Loren only hotter and more left wing…

  67. Matthew Pilott 67

    ‘Sod! I think Billy’s after you again! (or was it the other way around?)

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