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Zero is a cut

Written By: - Date published: 9:30 am, March 25th, 2011 - 24 comments
Categories: budget 2011 - Tags:

As we brace for this year’s budget it’s important to remember that no change is a cut. A dollar today buys nearly 5% less than it did a year ago and there are 1% more New Zealanders.

Not every piece of government spending is affected by domestic inflation or population growth but the bulk of it is. And that means that no nominal change in funding is a 6% cut.

Even Bill English has admitted as much, in response to questioning from Russel Norman:

Dr RUSSEL NORMAN (Co-Leader—Green) to the Minister of Finance: Does he agree that due to inflation, no new spending in the upcoming Budget is the equivalent of a cut in real terms?

Hon BILL ENGLISH (Minister of Finance) : It depends on which part of the Budget—and I am not trying to be clever about it. Some services will continue to get somewhere near an inflation adjustment, such as health and education. Inflation adjustments will continue to be made to income support programmes such as superannuation and benefits, which are very large components of the Government’s annual Budget. There will be services that will have no increase in spending, and that means they will be cut in real terms. We have a strong expectation that everyone supplying public services needs to focus on providing more services for less money, and that is not a new message.

This is the most subtle and insidious way that the Right can undermine public services, by letting inflation and population growth do the work for them. Even when it comes to health and education, the Nats can say ‘we’ve spent more than ever before’ but if that increase doesn’t match inflation and demographic needs, it’s a cut.


24 comments on “Zero is a cut”

  1. Lanthanide 1

    Wow, a very straightforward answer from Bill. I wonder why.

    He didn’t even drop in the usual attack on Labour, or claim that an aggressive recovery would make everything better again and not to worry out little heads about it.

  2. PeteG 2

    This sort of creepage is common – under Cullen it happened for nearly nine years, where no changes meant many people paid more income tax, year after year, as they crept up the brackets.

    But that doesn’t really affect the current argument – should we keep spending more and borrowing even more?

    • Bright Red 2.1

      false dichotomy. the spending could be funded by reserving tax cuts for the rich and subisdies for polluters.

    • Colonial Viper 2.2

      But that doesn’t really affect the current argument – should we keep spending more and borrowing even more?

      Government spending is the only thing keeping the economy going and stopping aggregate demand from dropping like a rock, since the private sector refuses to lift its game.

    • ianmac 2.3

      As a non-economist I thought that the famous “block of cheese cut” that Dr Cullen proposed then didn’t enact, was to counter the creep or is that fiscal drag. He decided that the cost/benefit was not worth it knowing that the then opposition would make capital out of it. (There. I used some economist speak!)

      • Herodotus 2.3.1

        The block of cheese was to be made every 3 years- based on the 3 years previous inflation figures – so we were still going backwards, wait 3 years to regain what was lost in our spending power. It did not take into account the initial years of the Lab govt. And people ask why Lab lost touch with the public. It was and still is damn hard to keep bread on the table. Just look at our current account deficit, we borrow to keep the masses: clothed, housed, fed and educated.
        It was tokenism at its lowest level.

        • Peter

          Every day you go to work your dollar is worth less. I’ll vote for the political party that can increase Real Income. Do you know any?

    • lprent 2.4

      Now that is begging the question.

      Or should we raise government revenues to ensure that we can borrow less (and pay less interest ofer the long term, which is the kicker with debt)?

      It is quite clear that the tax cuts over the last few years were unaffordable when we are in one of the cyclic recessions that happen too frequently to ignore. There aren’t enough cuts politically available to more than dent the fiscal debt situation.

      Or should we live in hope (as the government is at present) that the economy has a aggressive recovery? Something that shows absolutely no signs of happening to increase government revenues (ie the faith based argument).

      Or should we sell assets to reduce government debt in the short term, while making sure that the overall costs to the economy rise in the long term?

      I’m sure that there are many other alternatives that I haven’t covered. But your simplistic attempt to constrain the debate is so characteristically predictable… It is like watching a caricature you’d expect to see in a cartoon..

    • Lanthanide 2.5

      ianmac mentioned this at 2.3 although got the slogan wrong, and I want to really highlight it further.

      In 2005, Cullen proposed to index the tax thresholds to inflation. Initially, due to low inflation, this would not have made a big difference to after-tax income. As such, the National opposition called it the “chewing gum tax cut” and went apeshit over it. The media glommed it all up. Eventually Cullen scrapped it.

      Since we’ve just gone through several years of quite high inflation, I think that had Cullen enacted that threshold indexing, the bands would probably be a bit different than now. It seems highly likely the top band would be higher than $70k that National considers people to become ‘rich’ at (Under Labour it would be $75k right now, and $80k come 1st April 2011), although the middle band at $48k is probably about what it would’ve ended up at under Cullen’s deal.

      Anyone care to calculate what the thresholds would now be had that policy gone through? Marty? I’d do it myself but have no idea where to get inflation data from and not 100% sure I’d get it right.

      • Draco T Bastard 2.5.1

        Inflation Calculator would probably be a good place to start.

      • Herodotus 2.5.2

        As the adjustments were to be made every 3 years, we would have only expereinced 1 adjustsment so far in 2008, with anther adjusment this year and then there were new taxes to take this “gift” away from us.
        “The move was derided as the “chewing gum” budget as it would have given many people just 67 cents a week more take home pay.
        Dr Cullen told MPs that the axed carbon tax had been tagged to fund the drop in revenue caused by raising the thresholds at which people moved into higher tax brackets. ”
        So it was not even intended to be a cut it was all smoke and mirrows. So Lanth we would all ghave been the poorer for it.

  3. ianmac 3

    Bill English also conceded that since all the Statistics NZ figures were not in because of the Earthquake damage, there could be a negative final growth figure. But he said, that was not important to look into the past (except to blame Labour for 9 long years…..) as we must look forward to improvement that is on the way.
    As Marty has shown, for we peasants things cost heaps more, and my neighbours and I hold Key and English to fix it like they promised!

    • PeteG 3.1

      The best thing we peasants can do if things are costing heaps more is to address our own budgets, sitting around expecting the government of the day to fix things for us is doomed to disappointment. We can’t always rely on a lolly scramble around election time, if that always happened the country would go broke. Hang on….

      • Bright Red 3.1.1

        I remember a few years back when the righties were complaining about Labour runnning huge surpluses and demanding more lollies by way of tax cuts, which National duly gave them with borrowed money.

      • M 3.1.2


        I don’t know what planet you inhabit but as one of those said peasants I can’t trim my costs anymore. Don’t know about you but eating and being clean rates pretty high on my list, and no, I don’t take five showers a day but try to be careful with energy as I’m a peaknik. I make most meals from scratch and food waste is kept to a minimum. I usually have celery in my garden as the price of it is outrageous and I can use this to make stock if there happens to be a chicken carcass from a roast meal.

        I do not expect a lolly scramble but I do expect to be able to get by without thinking what the hell am I going to do if my washing machine breaks down.

        The reason the country is going broke is because John Key and his coterie voted themselves a massive lolly scramble and managed to manufacture a financial crisis so that selling off assets would seem to be the sane and sensible choice.

        You might like to toady to this mob and be ready to swallow their crap but most aren’t or are getting to the stage where they aren’t willing to believe the crap NACT spout anymore.

  4. RedLogix 4

    Came home last night and announced to ‘her indoors’ that I was sick of working to support the family and I was going to quit. We could just go to the bank and live off borrowed money.

    When she went all peculiar on me I tried explaining that “well that’s how the govt is doing it, so why can’t we?”.

    For some reason this didn’t help.

    • ianmac 4.1

      Clever Red Logix. Yet Bill English keeps on explaining that he is just doing what a prudent housekeeper would do. Say what?

  5. sean14 5

    Marty – 4 days ago it was Slash and Burn, now it’s Zero is a Cut. What’s changed?

    • lprent 5.1

      It is the same thing – did you only read the title?

      Perhaps you should actually read the article. Come back and ask if you find any concepts that are too hard for you to understand. But please check with wikipedia first. You’ll find that the explanations for ‘inflation’ and ‘population growth’ are both in there

      • sean14 5.1.1

        The first paragraph of the Slash and Burn post talks about “Cuts of up to 32%”. That’s hardly the same as failing to compensate for inflation (unless the economy is in much, much worse shape than we are being led to believe).

        • lprent

          There are both.

          From what Bill English has been saying (you can find the links in the posts), some budget items are going to get severe cuts. Others like education and health are going to get increases, but increases that are less than or at best equal to the the inflation rate (in the latter case not increasing to cope with population increases is also a cut). There will be a range in between those points.

          It looks like all existing programs are going to get an effective cut in real terms on a per capita basis.

          The economy is actually in pretty bad shape. Not because particularly because of the business levels, which appear to have stopped dropping. It is because the governments revenues are not covering its expenditures. Basically the drop in company profits and the reduced numbers of people in work have markedly reduced the government revenue, while at the same time paying for all of those extra long-term unemployed has massively increased expenditure. And that was before the cost of the quakes is counted in.

          This is something that was completely predictable from when the tax cuts went through. Labour’s tax cuts would have been bad enough (and I disagreed with them) but at least they were spread over almost everyone including most of the people who are now unemployed. Nationals tax cuts were idiotic because they reduced the tax take from those who are still working in the recession.

          And you notice that the tax cuts haven’t particularly helped with a “aggressive recovery”? It was a silly idea more rooted in blind optimism than any rationale. Cutting costs in the governments expenditure is what NAct is now doing – the problem with that is that it will further depress the internal economy and further entrench and increase long term unemployment- just as it did in the early 90’s. That just delays any recovery for quite some time and uses debt to pay for the current ‘living’ expenses.

          Basically what NAct should have been doing is to reverse tax cuts (as being a silly error of judgement on their part) to a more sustainable revenue position. Then they’d be able to use their ability to raise debt into increasing the infrastructural projects now that we need to grow when a recovery takes place. It’d employ more people and prevent the issues that come from long-term unemployment slowing down any recovery.

  6. HC 6

    To put all this in very simple words: All low income earners, the beneficiaries and a larger and growing share of the so-called “middle class” are now going to be asked to pay even more for the tax cuts that only benefitted the truly high income earners!

    I think that Bill English was rather sombre about all this, because he senses that the voters could within coming months realise that they have been “done” by this government. Only the strongest supporters of National and ACT (the upper 5 % of income earners and asset owners) have benefitted from the tax cuts, while others have not seen any improvement or even seen a substantial worsening of their circumstances. The majority of voters may actually wake up at last and vote this crowd out. That is what Bill English, John Key and consorts are worried about most!

    Now I am really looking forward to being work-tested as a sickness beneficiary from May 2011 onwards! Having been on an invalid’s benefit for good reasons and then been put onto the sickness benefit due to apparently biased and totally unreasonable decisions by WINZ paid designated doctors and a similarly “un-independent” Medical Appeal Board, I will as a sick person have to compete with all the other well qualified and desperate people for probably just a part time job.

    That will do my health a hell of a good, will it not?

    This government has NO answers, NO plans, NO future direction, NO brains, NO sense of fairness, NO respect for the worse off and NO sympathy for those very much at the bottom end of the food trough.

    Sadly the Labour Party is lacking in direction, in serious determination and in honesty to really present a feasible alternative. I see a weak Phil Goff, a pathetically uneffective Annette King and many young upstarters that are still green behind their ears.

    Again voters will be faced with a choice between lesser evils. NZ politics is in a very, very dismal state of affairs. My vote will go to a more honest small party, and that is the only hope many of us have now.

    • ZeeBop 6.1

      I’m surprised oil prices are only $100 a barrel. And now Nuclear is in doubt, seen now rightly as prohibitively expensive when the cancer costs, risks are added in. Can you imagine that, oil $200 and all those foreign rugby fans having stayed at home, just as National go to the polls with having done nothing but hold back progress.

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