Remember during the 2008 campaign when John Key was telling us we didn’t have a debt problem, we had a growth problem? Well, now he’s admitting we’ve got both. That’s pretty sharp work: just two years to leave one of the best government balance sheets in the world in tatters. Key can blame misfortune, but he’s the one who slashed tax revenue.
To be sure, the country has gone through a rough patch of extraordinary events that have an impact of the government’s books: the South Canterbury Finance collapse, the Christchurch Earthquake, the Kiwifruit scare, and, now the loss of Pike River as a mine and the costs associated with the human tragedy.
But that’s exactly why responsible government like the last Labour government don’t run their books so close to the edge in the first place – a couple of pushes and we’re over. Even in 2008, with the economy slowing and an election with tax cuts as the major issue, Michael Cullen refused to let the surplus get below his “comfort point” – a surplus of 0.7% of GDP and net financial assets steady of GDP*. Cullen realised that things can go wrong and that a good part of the government’s financial assets are set aside specifically as insurance to pay when they do (the EQC Fund being one).
Key and Bill English gambled that nothing would go wrong. They looked at the healthy books, ignored that a lot of that money is, in effect, Kiwis’ accumulated insurance premiums, and said ‘well, we can afford to borrow more for tax cuts’.
Which is what they proceeded to do.
Under Urgency in December 2008 the Nats canceled the second and third tranches of the Cullen cuts and replaced them with more expensive cuts targeting the wealthy. Only the first round of National’s cuts were delivered, the subsequent tranches were canceled – under Urgency – when the Government suddenly realised that we were in the middle of the biggest economic crisis since the Great Depression and couldn’t afford more cuts. Nonetheless, the tax cuts that did come into effect – targeted at the wealthiest New Zealanders, meant another $1.5 billion a year in borrowing (they thought it would only cost a billion, oops).
Then, late last year, the government passed what was basically a tax cut for polluters. Rather than pay for the carbon credits they owe for their emissions, polluters now get half of them free at a capped price. This tax cut for polluters is costing a billion dollars.
By Budget time this year, Key and English had decided that the country could, after all, afford to borrow more for yet more tax cuts targeted at the rich (ironically, if the Nats had kept their 2008 package in place the second round coming in during 2010 would have been reasonably fairly distributed). So they borrowed to another half billion over and above with the offsetting GST rise etc.
That’s $3 billion per year of additional debt because of Key’s tax cut mania. Couple that with some bad luck and it’s no wonder government debt is shooting out to what even Key admits is ‘the limit‘. But you can’t blame the bad luck: disasters happen, which is exactly why a government should keep a buffer and not borrow for tax cuts.
Kiwis (well, the richest ones) have had three rounds of income tax cuts in two years. Yet 70% of people say they haven’t noticed any effect from their tax cuts, which Key says leaves him “a little surprised, actually”. If only he was a little less surprised now and a little more prudent in the past.
When we hear just how bad the government’s books are today, remember that National made them so bad by borrowing $3 billion a year for tax cuts that no-one noticed, and it’s likely to go into the next election promising more of the same.
* what the hell was Colin James talking about when he wrote: “[English] aims to eliminate the structural budget deficit built in Labour’s later years by 2015-16”? There was no deficit in any out-year in any Labour Budget. James has been listening to English’s lies again and not bothering to factcheck.