Budget A Failure On All Fronts
Richard Prebble’s Post-Budget presentation, Crown Plaza Hotel
This week's Budget - the Budget of 2004 - is a turning point.
Over the past 20 years, successive Finance Ministers have had a vision of New Zealand having a First World economy.
They have expressed that vision in different ways: number 10 in the world by 2010, to have a standard of living equal
with Australia or, as Dr Cullen has expressed in his previous Budgets, to be in the top half of the OECD.
Roger Douglas, Ruth Richardson, Bill Birch and Dr Cullen did not promote a high standard of living just so we could
have two cars in every garage.
They understood that if we are to have world-class education, First World health services and security in old-age it
all depends on having at first world economy.
We cannot tax ourselves to prosperity. If we want to keep our young people in New Zealand - to have them build their,
and our, future in their own country - we must offer them world-class opportunities in this country.
In the past 20 years there have been just two Budgets that have reverted to the politics of tax and spend, Budgets
which brought New Zealand to the edge of a South American-style economic collapse. Those two Budgets were David
Caygill's Budget in 1989 and Winston Peters' Budget in 1997.
This week I recalled David Caygill's Budget when someone in the misery industry described our Finance Minister as
Michael `Joseph Savage' Cullen. David Caygill likened himself Michael Joseph Savage after he delivered the 1989 budget
David Lange - who had, six months earlier, fired Roger Douglas - called that 1989 Caygill effort a "traditional" Labour
Budget. The parallels are striking.
In 1989 the Labour Government was behind in the polls and facing an election defeat in the following year. They thought
the way to avoid election defeat was a big-spending traditional Labour Budget. It didn't work. The result was the
biggest defeat in First Past the Post history.
The second big spending Budget was, of course, Winston Peters' Budget in 1997, when he increased spending by a massive
of $5 billion. Both Budgets wasted billions of taxpayers' dollars. Both were economic and political failures.
I note that the Greek chorus from the misery industry, who had been praising Labour for re-distribution spending, have
claimed that this is the first spending Budget for 30 years. They forget the 1989 and 1997 budgets. We now know both
those Budgets failed. This week's Budget will also fail.
The fact that Cullen's Budget will be a failure economically is ignored by most commentators. Media commentators have,
instead, been mesmerised by the Government's own spin. Over 90 percent of all post-Budget analysis has been looking at
the position of various lower-income families. The commentators accept as self evident that more Government spending
solves poverty - it never has. They ignore the iron law that whatever Governments spend more on, you get more of.
Allow me to first analyse the Budget in the terms of the goals set by Dr Cullen in his previous Budgets.
Will the Budget take New Zealand closer to the top half of the OECD, and give us an economy delivering a world-class
education, a first world health system and security in old-age?
Let me quote from the budget speech
"in 2003 New Zealand economy grew by 3.5 percent compared with the average of 2.2 percent of the OECD as a whole."
The economy that Labour inherited upon taking office was in very good shape. That growth was inherited, not created, by
Labour.
The OECD reports that, for the past decade, New Zealand has outperformed the OECD average growth rate. Will this Budget
continue that record?
Let me quote you Dr Cullen's speech again:
"Budget 2004 forecast growth for the year to March 2005 of 2.8 percent, falling slightly further to 2.5 percent for the
year ended March 2006".
Is this decline in growth caused by the international situation? No. The Budget economic outlook says:
"the growth rate of New Zealand's trading partners is forecast to be 4.2% over 2004".
So, at a time of rampant growth abroad, the Labour Government has engineered an economic slowdown.
So, in terms of the goals that Labour itself set for New Zealand, this year's Budget is a failure.
Michael Cullen seems to have given up his goal to grow the economy. He appears unable to persuade Cabinet to agree to
tax cuts, or to stop Ministers passing laws like the Holidays Act that will choke growth. Growth hardly rates a mention,
and there are no plans to grow the economy.
It is a failure that will have serious long-term consequences for every New Zealander's standard of living. This
failure will affect the sort of education we can offer our children, the healthcare we can provide for the sick, and the
security we can offer the elderly. It is a tax and spend Budget.
In the 2004 Budget the Government is planning to take record amounts of taxation. Tax revenues have increased faster
over past five years than any other time in New Zealand's history. The total tax take has gone from $33 billion to $44
billion - an increase of a third.
Labour New Zealand's record tax collector - introducing over 30 stealth taxes. But the biggest tax increase has come
from the Government doing nothing.
The effect of inflation has pushed 20 percent of all full-time workers into the 39-cent tax bracket, and I remind you
of Helen Clark's promise on the credit card with its digitally perfect photograph where she stated "no increase in
income-tax for 95 percent of taxpayers".
Labour has abandoned the principal that taxation should be raised from a whole nation for the benefit of everyone. And
Labour has put forward this Budget in the idea that it is the role of Government to raise taxes from its political
enemies to reward its political friends. There is no pretence here, and the taxation system is not in any way fair.
In this year, just 15 percent of all taxpayers will pay 56 percent of all personal income tax. Up to 55 percent of the
nation will pay just 14 percent of all income tax.
It could have been so different.
A $6 billion surplus was an historic opportunity to take New Zealand onto a new high level of growth. The Finance
Minister himself says in the Budget that for $5.5 billion, New Zealand could have adopted a flat tax rate of 20 cents in
the dollar for both companies and individuals. Just imagine the investment, growth and prosperity that would have come
from a low flat tax rate.
This Budget will be a social failure, in that the incentive is now to go on a low-wage, low growth path, because this
Government has created the classic poverty trap.
The effective tax payable by a family with two children on an income of $25,000 a year is 88 cents on every extra
dollar a day. For every extra dollar they earn, they keep just 12 cents. This is caused by the increase in income tax
coupled with abatement effects of losing their government subsidies. It is now in their interest to keep their incomes
low, and they know it. They will simply refuse to take pay rises, refuse to work overtime - some will actually ask their
employers if they can work fewer hours.
I predict that the Budget will be a political failure - just as the Caygill budget of 1989 was a spectacular failure,
and so too was the big spending Budget of Winston Peters.
Let me explain why.
First reason is that the electorate is not as silly as politicians like Helen Clark believe. The public knows that you
can't tax your way to prosperity. The people know that this Budget is not about future directions, but all about future
elections.
The second reason is more about human nature. We humans are prepared to make sacrifices as long as we know that
everyone else is too. I can recall that, when we introduced the Budgets that all commentators said would be electoral
suicide - because the Budget was so tough - to our astonishment, the Government's popularity went up and not down.
This budget is going to lose everyone's vote.
First, the Government will lose the vote of the 1.2 million New Zealand households that receive nothing from the
Budget.
Within those 1.2 million households is the majority working families with children. Most families who work do not
receive anything from the Budget. If you are in the $60,000 a year bracket, in this city, with one child, you receive
nothing. Indeed, the Government hits you with the 39-cent tax bracket. Labour regards people on $60,000 a year as rich.
The families who have missed out from the Budget deeply resent it.
But Labour will also lose support from the 300,000 households who will eventually gain from the Budget. If you work for
a living, you will not benefit until April 2006, two long years from now. Working families think this is unfair.
But the Government has a further problem: a working family will only benefit in two years, provided they remain on a
low income. Most of today's families do not expect to be in that position in 2007. Most of the 150,000 working families
who will, in two years time, benefit from the package don't know it. Many of those who will eventually benefit will be
young people with their first child. Today those young people have not even married. That child is not even
contemplated.
You might say that at least the 150,000 benefit-led families are grateful for the Budget. They are not. Most people on
a benefit are planning to get off. Most of today's beneficiaries do not expect to be on a benefit in April next year.
One third of all beneficiaries will have left the benefit before the increased payments start.
So, while it may well be that within two years some 300,000 New Zealand households will benefit from a Budget, most of
those voters don't know that they will be in that position.
Despite spending billions of hard earned dollars, nearly all New Zealanders believe that this Budget will not assist
them.
There is a piece of very sage advice given to budding politicians - never agree to judge a baby show: you lose the vote
of every mother. Every mother whose child loses will never forgive you. You will also lose the vote of the winning
baby's mother, for having taken so long to select her baby.
I predict that this Budget is not only an economic and social failure, but also a spectacular political failure.