The 2005 Election Debate on Tax and Political Philosophy (index)

Keywords: Regulation & Taxation;

In late August 2005, I found myself engulfed in the Taxation Debate which blew up during the election campaign. The following lists my contributions on this website.

On 5 July 2005, I spoke to the St Andrews Trust on Religion and Society in their election series on In Praise of Fiscal Sustainablity. It was subsequently published on the Scoop website (with pictures), and appears to have been widely read.

When I prepared the lecture, I overlooked the significance of the expenditure contingency reserve, which is the amount the budget sets aside for unexpected government expenditures. This is being used by the Labour Government to fund its election policies. As I say in one of the speeches below, this is not always a prudent thing to do. I thought I might have to modify the St Andrews speech, but as it happens – again explained subsequently – National’s proposed tax cuts are so much greater than the contingency reserve, no adjustment was necessary, if the text is read in terms of Labour’s policies at the time of the election rather than at the time of the budget.

Waste Not: Want Not was prepared as a Listener economics column on the assumption that National would propose fiscally prudent tax cuts, based on their cutting ‘waste’ (they mean ‘programs’). However, when National announced the size of its cuts, I canned the column for another. It wont be used, because its ‘news’ significance will have gone after the election, although no doubt I shall cannibalise some of it. I am putting it on the website for the record.

The replacement column Pandering to Greed or Promoting Principle? was published in The Listener in its ‘tax cuts’ issue of September 3.

Between writing these two and the publication of the second, I met an earlier invitation to speak to the Diplomatic Club of Wellington on What the Tax Debate is Really About on 25 August. As the paper explains, my original intention had been to reflect on my time in Europe as a guest of the German government and what was happening to the Social Market Economies that the citizens of Europe valued. Unfortunately I had to talk about the effects in the differences in fiscal stance between the two parties, and the philosophical exposition suffered as a result. Scoop put it on the website (with a picture).

Aboutt the same time – boy, it was a pressured week – Ruth Laugesen asked me (and Gareth Morgan and Rod Oram) a set of questions which she wrote up as The Truth about Tax in the Sunday Star-Times of August 28. Let’s Talk About Tax gives my full responses.

Inevitably there is some repetition in all this, but it would miss the point and the different voices to edit it all to a single piece.

Added on 4 September

I appeared on TVNZ’s “Breakfast” at about 7.15am on Friday September 3 to comment on the party finance spokeperson’s debate of the previous evening.. Look under the picture of the piggy and the money to “The finance debate evaluated (7:20)” for the video clip.

My main point was that the discussion, to use a polite term, had very little to do with what will be the economic issues preoccupying us in a couple of months. I listed them as:
– the poor productivity growth;
– the current account balance of payments deficit;
– the oil shock;
– inflationary pressures*;
and went on to say I was fearful that the public not understanding these issues, might vote in a way to make them worse.

* I omitted mentioning inflation, because I was thinking about it in relation to the other three. On reflection I think it should be separately listed, as I have done so here.

Added on September 6

I did some calculations of the distribution of the tax cuts, which I thought others might be interested in.

Added on October 15.

I appeared on TVONE’s ASB morning business show on Monday 12 and Wednesday 14 September to comment on (Maori and National) party manifestos, where again I emphasised fiscal prudence.

As did my first post election Listener column, It’s the Economy, Stupid: The election was not about the economy. Why? (8 October) which finished “Well, yes, we have never had [the economy] so good. But to get better is going to require some hard work, beginning with more fiscal discipline.”

The same weekend as The Listener came out Ruth Laugesen published a Focus Story in the Sunday Star Times Don’s lessons for Helen (25 September) which contained the folowing:

“National has also set the agenda on government spending, arguing there is much government waste.
“Labour protested during the campaign that there was no fat to be cut. But Wellington economist Brian Easton expects that a Labour-led government would start a detailed review of government spending soon after coming into office.
“Easton says spending needs to be kept firmly under control to avoid pumping more money into an overheated economy.
“‘What you need is a really tough politician to chair the review,’ he says. ‘Not Michael Cullen, he is already far too busy.’
“He suggests associate finance minister Trevor Mallard would be ideal for the detailed, relentless scrutiny of spending.
“Even then, says Easton, it will be difficult to find savings in an already lean public service. He expects that, at most, savings might amount to 1% of spending, or $300 million.“

I add I have in mind the British system which use to be that the ‘First Secretary of the Treasury’ was a member of cabinet, whose primary task was expenditure control. His decisions would be appealed to the Chancellor of the Exchequer (who is the ‘Second Lord of the Treasury’, the first Lord being the Prime Minister). Mallard would do the job well, but he could not hold another major (significant spending) portfolio.

On 14 October in a speech to the New Zealand Credit and Finance Institute, Reserve Bank Governor Alan Bollard said a ‘more expansionary fiscal stance has the potential to aggravate the current account deficit as well as increasing the work monetary policy has to do in order to contain inflation. These pressures will need to be borne in mind as the incoming government considers its fiscal options.’

On the 15 of October the New Zealand Herald devoted almost all of its front page an editorial, a cartoon and the first Business Section page to the speech. Optimists may assume the national debate has finally caught up. Pessimists will observe that in a pres release later that day National says tax cuts still affordable.

Minor Parties
My focus has been on National versus Labour’s tax cuts. I have not addressed the minor party’s proposals because while they are typically more extravagant than National’s, they are less likely to be implemented, even if the minor party gets into a government coalition. But the major parties just have to be fiscally responsible, or the economy is doomed.