The Letter: IT’S BOOMING

The economy is growing. Record volumes of freight are being moved, a first indicator of growth. The much predicted slow down shows no sign of coming. Judging from our suburb we predict the Warehouse sold record amounts of fireworks. When people are prepared to literally burn their money it’s a good sign they are confident of earning more. The international indicators are good. The US share market welcomed Bush’s victory. Oil prices fell significantly last week. Spring has finally come and with it remarkable grass growth. The Letter predicts that economy is significantly out performing official estimates.

A QUESTIONNAIRE

Before we carry on, a couple of questions. What do you think is the average household income? What do you think households pay in tax as a %? Write down your answers below.

HOW THE MONEY ROLLS IN

Record growth means record tax revenues. Cullen has become fixated by having a large surplus. His meetings with Standard & Poors made him realise how much weight the rating agencies place on the surplus. He personally seeks financial credibility. So Cullen feels he must be more conservative. This would be bearable except Cullen also believes he can spend your money better than you can.

RECORD TAX

Using parliamentary questions Rodney Hide found out how much of the average household’s income goes to the government in tax. Treasury replied that the mean household income is $55,600 per year. This is up nearly $5,000 under Labour. How much do we pay in tax? On these figures on average 46.3%. Before you say that can’t be so, remember GST, and we include rates, because just try not paying them. If you smoke you are really working until after lunch each day for Helen Clark.

NOT TRUE, SAYS CULLEN

When Rodney Hide revealed that under Labour, average household income after tax had fallen by $1,040. Cullen said that can’t be right. (So don’t feel bad if your guesses were wrong – even the Finance Minister did not know). When Rodney informed him that these are Treasury figures, Cullen replied that Treasury was wrong. It’s really unusual for a Minister to publicly question his department and even more unusual for the Finance Minister to suggest that Treasury can’t do figures. Cullen said he would get them to redo the figures and they would show household incomes under Labour had increased.

INCOMES ARE UP

Civil Servants do as they are told. When Cullen told Treasury their figures were wrong and he wanted new figures showing how much better off we all are the Treasury duly complied. Cullen released them in his war of words with Rodney. Average household income has gone from $60,510 in 2000, i.e. when Labour came to office, to $68,280, a 12.7% increase. The average household income is above the mean because some households have a number of incomes. The average household tax has gone from $19,760 to $24,960, which Cullen concedes is a 26.3% increase! But, Cullen triumphantly points out households’ after tax income has increased under Labour from $40,800 to $43,320. That is an increase of $2,520, meaning households are, according to our Minister of Finance, 6.2% better off.

COOKING THE BOOKS

The danger of asking departments to produce figures to prove an answer is that the officials in their eagerness to comply will often provide information that actually proves the opposite. "You have forgotten about inflation," replied Rodney. From December 1999 to December 2003 inflation increased by 10.4%. Using the information Cullen got the Treasury to supply, Rodney recalculated households’ inflation adjusted after tax income.

WE ARE WORSE OFF

In 2000 the average household’s net income was $45,058. Today in 2000 dollars, i.e. inflation adjusted it is $43,320. We are $1,738.45 worse off. That’s minus 3.9%.

THE RESPONSE

Rodney has fronted up and admitted he was wrong claiming that the average household is $1,040 worse off after tax under Labour and agreed with Treasury the real figure is $1,738.45. That’s the sort of party ACT is, big enough to admit a mistake. On Friday Cullen responded to these devastating figures by issuing a bizarre press statement, which said, "Mr Hide has made a basic mistake. The Treasury household tax estimate includes GST, which is a tax on expenditure not income. Therefore to do as Mr Hide has done and subtract an expenditure tax from an income base to arrive at net income is a nonsense". Translated, Cullen is claiming that we should not count GST when working out the average household’s income because we only pay GST when we spend the income. The problem with this approach is you can’t buy goods and services without paying GST. Perhaps one could say that the average household’s buying power after tax is down $1,738.45 under Labour. Amazingly there has been no coverage from the Press Gallery. Perhaps because the average journalist can’t do maths. See http://www.act.org.nz/households

IT IS ON CREDIT

So how do we explain the boom in consumer spending? We read about US consumer’s level of debt. In relative terms NZ’s debt is higher. The Reserve Bank has halted its interest rate rises because of its concern as to what these rises will do to the average households financial viability.

POLL

Last week we asked, "Do you support Stephen Franks’ bill restoring the common law rights to self-defence?" 99% of readers said yes. This week’s question, "Should government adjust the tax thresholds for inflation?" http://www.act.org.nz/poll - we will send the answer to Dr Cullen.

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