State Of It: Cullen's Burden - Budget 2007

STATE OF IT: The burden Michael Cullen carries into Budget 2007 is the dilemma: how to deliver to Labour's historical constituency, low-medium income earners, at a time when political pragmatism insists Labour must seduce center/centre-right voters.

That burden has now caused much debate within the Labour Party, factions are dividing, and its angst is showing in the polls.

That powerful group of medium/high income earning New Zealanders is what compels politicians and parties to swarm the political centre. It is this group that already holds wealth, has benefited from centrist economic policies of the past 11 years, has a bit of surplus dosh to invest, and has less interest on wealth building policies that is the lot of Labour finance minister, Michael Cullen.

The New Zealand Labour Party now faces the same conundrum that the Australia Labor Party (ALP) faced under the Beazly and Latham leaderships: how to win back support from those who have benefited from past Labor policies but who now demand centre-right economic policies as an assurance their wealth will continue to grow.

Also Pre-Budget Audio Analysis:

• (95bFM Audio): The Wire Cullen's Burden: Paul Deady and Scoop's Selwyn Manning discuss why Michael Cullen is being laden with this Budget 07 burden. Really, should we demand tax cuts? What's it all about then?

TV3's recent TNS Poll recorded a huge swing away from Labour. The collapse of Labour's party list support-base is likely to be caused by a number of issues: Labour appearing to follow National leader John Key's solution to the Section59 amendment bill; witnessing Key's capabilities, and Cullen's talking down expectations of personal tax cuts.

It remains unlikely there will be any sting in Labour's big Budget secret – except it may be about to deliver company tax rate reductions and further compliance cost relief (which is likely to be regarded as a wet flannel move).

This Friday, the Prime Minister is scheduled to deliver a post-Budget speech to the Auckland Chamber of Commerce. Is this customary? No. Is this to ensure business receives explanation/interpretation from the top as to Labour's true agenda? Probably.

Michael Cullen's style of fiscal/financial governance has a pattern that is demonstrably third-way Labour.

Cullen's determination is to assist business to create wealth, to drive a tight fiscal programme, and to distribute surplus through target-structured policy. The Cullenesque approach has been to empower businesses that propose to assist Labour's export-led economy – especially those displaying expertise in tech-innovation and value added venture and services.

It remains clouded as to how National would deal or deliver to Trade and Enterprise New Zealand, Business Mentors New Zealand and such recipients of government 'investment'. Labour's track-record has displayed commitment by reducing and in some cases taking the cost-burden away from businesses transcending into export service and commodity markets – which offers confidence to company directors during the early stages of (what could be) the cost heavy research and development period.

Trade and Enterprise New Zealand is helping many marry research-and-development initiatives to return-on-investment realities. Business incubators (through governance/management advice) and organised clusters are assisting businesses all over New Zealand to achieve higher profits and prosperity. Compliance costs remain a burden for many who struggle to go it alone. But relief can arguably be achieved by cluster/business-to-business relationships sharing administrative and legal requirements. This has all been fostered under third-way policy.

The National Party's strategy, to date, has been to massage wage earner disgruntlement by claiming Cullen is not giving wealth created by tax payers back to the very people who have had their hand to the plough. National's rhetoric has been personal income tax focused as opposed to going into bat for company tax relief. Not only is this a defining point of difference between those stakeholders its former leader Don Brash represented, it is a clever move.

To be fair, John Key has yet to roll out detail of how National specifically intends to engineer the New Zealand economy. Sifting through the speeches and statements, one becomes aware of an assured and competent leader. National, under Key and deputy Bill English, is building a public perception of a Cabinet-in-Waiting. But New Zealanders must be privy to detail. And detail is, as yet, scarce.

National of course will always represent business. But its strategy to circumnavigate Labour and reach into its traditional base draws the centre-fringes of Labour's historical constituency over to National. And this, one suspects, is a factor driving numbers within the Polls to drift from Labour to National under John Key.

The advent of Cullen's burden is fragmenting support from Labour's own. Those who seek a quick-fix are demanding personal income tax rate cuts, and if TV3's polling is correct are suggesting Cullen be sacked should he fail to deliver.

They are best reminded that the General Election looms in the medium-term. Short-term remedy is short-lived.

But importantly, is National's claim that workers are being robbed fair or accurate?

In Australia, the federal government's treasurer Peter Costello last week delivered a Budget that slashed Australians tax liabilities by billions of dollars.

The ABC network reported Costello had cut income tax for a fifth consecutive year "because the economy can afford it". Tax cuts, it stated, are a "political bonus just before an election".

"They will begin in July, when lower income earners will get about $16 a week. That advantage would be negated if they prompted an interest rate rise but Mr Costello says they are not inflationary and he makes no apologies for reducing income tax," ABC reported.

Back here in New Zealand Cullen for the third year running was by comparison appearing rather scrooge-ish. He had to dampen down expectations of personal tax cuts arguing, the consequences of taking that course would be inflationary.

Cullen's problem lies less within himself or those of his party, but more in that the broad perception within the minds of the New Zealand public is that Australia and New Zealand are similar. The reality regarding our respective economies, as it is for foreign policy, is quite the opposite.

While Australia and New Zealand have many similarities (speak a similar language and enjoy a bit of sport) you simply cannot compare the two economies.

Australia's multi-state structure adds complexity beyond our contemporary political consideration. Australia's state to state commodity cultures (such as West Australia's mineral and ore rich export-led economy, compared to NSW's consumer driven economy, and Queensland's produce and tourism economy) vary markedly.

Here in New Zealand ours obviously is a mono-state economy, more simple to govern, more simple to predict, more identifiable are the consequences of policy shifts. Cullen is right to warn that adjustments to personal income tax rates will, at this time, lead to higher inflation.

For New Zealanders, a drop in personal income tax will mean higher inflationary pressures. The Reserve Bank will adjust mortgage interest rates in line with the requirement that it contain inflation below its percentage cap requirement and abide by former finance minister, Ruth Richardson's Fiscal Responsibility Act.

To ensure compliance Reserve Bank governor, Alan Bollard, will increase further the Official Cash Rate (the economy is already under renewed consumer spending pressure), which will cause home mortgage interest rates to nudge upward again, taking more hard earned dollars from the wallets of centre positioned medium-to-low income earners.

Increases in home mortgage interest rates will also cause landlords who have borrowed against their rental properties to up the weekly rent. Renters will pay more for the roof over their family's heads.

And so, upward the spiral of living costs goes.

For National, this isn't so bad. Cullen's burden – irrespective of whether his Budget day move be short or medium-term is National's gain.

It has been decades since National held the interests of the medium to low income earner close to its heart. Its constituency is different to Labour's. Politically, it is able to risk seeing dollars saved due to tax cuts go from the wallets of mortgagees and renters to landlords and banks. The political risks for National are not compounded should higher income investors, property speculators and businessmen become the beneficiaries of fiscal policy. They are after all National's true constituency.

Where once National advocated policy that ensured we paid our PAYE as a percentage proportionate to our income band – today the National Party's strategy rests on a premise, albeit rhetorical, to edge personal tax rates downward toward that of a flat single-tier.

And it is absolute: that the mechanisms that underlie how wealth is distributed here in NZ ensure tax cuts shuffle wealth from the pockets of income earners into the hands of investors and the well off.

In today's language: if you save $20 in tax per week - should you be a mortgage payer or renter - expect to lose $30.00 per week. In old-speak: the Lord Exchequer can giveth with one hand, and he can taketh away with the other.

Company tax relief – on the other hand – reducing from 33 percent to 30 percent will meet head-on some of the demands emerging from a significant proportion of Labour's Centre-Centre-Right constituency. It is political. A necessity.

But Labour, unlike National and Costello, also has a political mandate to ensure wealth reaches the centre-left medium to low income earners.

Cullen's style is to refuse to leave such things as wealth distribution to risk (as it was during times of the so called trickle down theory).

Cullen's style is to distribute wealth (government surpluses) through centralised policy controls. While it is accurately argued Cullen has preferred to increase government spending – it is incorrect to suggest he has failed to give back this wealth to those who have helped earn it.

Cullen's preference is to distribute this wealth via policies such as Working For Families, and housing investment schemes, equity investment schemes, skills assistance, while looking after the nuts and bolts of providing funds for the social services – where one may or may not concede efficiencies are long over due.

If there is criticism of Cullen's commitment to social spending it lies in anomalies to reach the very impoverished or to address the wants of New Zealand's poor. If Cullen possesses a nip of old-Labour-Party conscience, he will acknowledge that New Zealand cannot truly prosper until all its peoples, the grossly impoverished included, are able to discover hope that they too can reach their potential. To date, the social conditions for this to germinate simply do not exist.

Cullen has through policy, such as those mentioned above, ironed out some of the wrinkles that existed in the NZ economy. But he most certainly has a long way to go before fairness and equity spells out equality or ensures all New Zealanders are able to see, let alone reach, their full potential.

Budget Guess: No tax cuts for income earners – Probable Tax Cuts for business reducing from 33 percent to 30 percent on net profit earned, with a few complex fish-hooks thrown in.

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