Rodney Hide Speech to Takapuna North Rotary, Milford Cruising Club Monday 4 July, 6pm

Our Finance Minister Michael Cullen is a man on the run.

Ever since his 'chewing gum' budget last month he has been travelling the length and breadth of the country trying to defend the indefensible.

Almost single-handedly he has trashed Labour's poll ratings and the country can now look forward to a real election contest.

At issue will be two visions for New Zealand.

One will be the vision of a big-government, high-tax, nanny-knows-best, decide-everything-in-Wellington New Zealand.

That is the vision of the Clark-Cullen government.

They say, "trust the politicians. They know how to spend your money better than you do".

The other is a vision of a limited-government, low-tax, let-the-people-decide New Zealand.

ACT stands for that vision. We stand for that vision more strongly than any other party.

We say, "trust the people".

Nowhere will the contrast between these visions be clearer than in the debate over tax.

The good thing about the budget is that it is forcing Cullen to start to debate the issues.

Until now he has spent most of his time in a hole in the ground like Saddam Hussein, making ludicrous assertions about tax.

I am determined to flush him out. The fourth estate has a duty to do the same – to put him on trial.

I spoke recently about five of Cullen's assertions about taxes that are just plain wrong.

Cullen thinks taxes don't harm economic growth.

You only have to compare the current stagnation of the high-tax countries of continental Europe – like Germany, the economic model Cullen most admires – with the performance of lower-tax Britain, Ireland, the United States and Australia to understand how wrong he is.

Cullen thinks you have to cut government spending if you want to cut taxes.

But all you actually have to do is to keep a tight rein on spending while the economy grows.

Mainly by following this strategy, Ireland brought the ratio of government spending down from over 50% of Gross Domestic Product (GDP) to around 32% in little more than a decade. This allowed Ireland to follow a low-tax strategy. So you don't necessarily have to cut spending at all to implement tax cuts over time.

But how many people think Cullen is spending the hard-earned money he is taking off them better than they could?

There is enormous scope to cut wasteful and poorly targeted spending.

Cullen also says he doesn't have a real budget surplus that could be returned to taxpayers.

But, his accounting is bogus and he doesn't need to run huge operating surpluses to put money into his irrelevant superannuation fund and to insist on ideological grounds that the Government should fund investment that could be funded by the private sector.

Cullen argues that tax cuts only benefit the rich

By which he means people earning over $60,000! Tell a senior teacher on that salary that they are among New Zealand's rich.

The reality is that many people stand to benefit from lower taxes as they work their way up the income ladder and that lower taxes mean faster growth, which benefits everyone.

ACT's tax policy would boost New Zealand's growth rate over time by at least a full percentage point of GDP a year, according to Treasury estimates.

The fifth argument of Cullen's that I discussed was that tax cuts are inflationary.

This is the most economically illiterate proposition of all.

Inflation is a sustained and ongoing increase in the general level of prices. It is a monetary phenomenon. Only central banks can generate inflation.

Are low-tax countries like Hong Kong and Singapore inflation-prone economies? Tax cuts actually help reduce costs and inflationary pressures.

Cullen isn't responding to these criticisms, which are coming not just from political parties but also from bank economists, business organisations and other economic commentators.

The media should help flush him out of his hole.

His latest diversion is to try to tell the country that even though he admires big-government Germany, government spending has actually been "managed down" on his watch and New Zealand is in fact a small-government country.

Here's how he told the story recently in a speech in Waipukurau.

"In 1999, central government spending (that is, excluding state-owned enterprises and local government) was 33.3 per cent of GDP. It is now 30.1 per cent. That means there has been a three percentage point decline, or a ten per cent fall, in the relative size of central government".

This is blatant dishonesty. Only someone with Cullen's arrogance could make such a statement with a straight face.

The facts are these.

First, the 33.3% figure Cullen uses refers to the fiscal year 1998/99, which ended in June 1999.

Labour came to office in late 1999, too late to affect the fiscal outcome for the next fiscal year ending in June 2000 in any significant way.

That should be the base year for Cullen's comparisons. Core Crown operating spending in 1999/00 was 31.4%. So the fall Cullen is talking about on his watch is just 1.3 percent, or a 4% decline.

Secondly, that decline is itself a lot less than the decline that was planned by the previous government. The 1999 Pre-election Economic and Fiscal Update projected a 2.3 percent point decline between 1999/00 and 2002/03. So, far from "managing down" government spending, Cullen set it on a higher path relative to previous plans. Only Cullen could do worse than expected and claim to do better.

Thirdly, Cullen's plans were confirmed in his first Budget Policy Statement. He raised the long-term target for operating expenses under the Fiscal Responsibility Act from 30% to 35% of GDP. It hardly behoves him to claim he is a low-spending politician now. And he is putting around two percent of GDP a year into the Cullen fund, which is on top of his 30.1% figure.

Fourthly, what Cullen didn't tell his Waipukurau audience is that government-operating spending is set to balloon in the three years to 2007/08 from 30.1% to 32.3% of GDP.

That is an increase of over 2 percent or nearly 10% in the relative size of central government.

And this is before the bills from other daft government policies fall due.

In the weeks since the budget, we have heard that taxpayers will be asked to pay more to upgrade the rail tracks and that the decision to ratify the Kyoto Protocol will cost more than half a billion dollars in the first commitment period alone.

No wonder Michael Cullen has been making anxious comments about the need for spending to be reined in – while still claiming he is a low-spending Finance Minister.

As always happens with Labour governments, after an initial period of caution, spending is now out of control. It is set to increase by a staggering 28% (excluding GSF revaluations) in the next four years.

Government is set to grow over 50 per cent faster than our economy.

Cullen also had the gall to tell his Waipukurau audience that relative to the size of the economy, New Zealand today is not a big-government, high-tax economy.

This is also a fraudulent claim. Let me demonstrate this in three ways.

Comparisons with other countries

New Zealand only appears to be a small-government economy by comparison with the bloated welfare states of Europe.

The OECD estimates that New Zealand's ratio of general government outlays (including local government and calculated on a standard System of National Accounts basis, which differs from the basis used in the budget) was 38.7% in 2004.

This is well below the OECD's estimate for the European Union average that is 48.4%.

However, it is significantly above the ratio for the United States (35.2%), Ireland (now up to 35.8%) and Australia (36.2%), all richer and better-performing countries than New Zealand. It is also far above the government spending ratios of Hong Kong and Singapore.

The tax take in New Zealand is seven per cent higher than in Australia.

If we look at tax instead of spending, the picture is (naturally) much the same.

Three-quarters of the OECD countries by number are high taxing European countries, yet they only comprise 35% of OECD GDP. The New Zealand tax-to-GDP ratio in 2002 was 34.9% of GDP. This is below the Euro-Zone figure of 39.8% but even on an unweighted basis it is above the ratios for the OECD Americas and the OECD Pacific of 26.1% and 29.2% respectively.

When the data are weighted by GDP and population, however, New Zealand's tax ratio of 34.9% is high even relative to the average OECD ratios of 31.2% and 30.9% respectively. (These figures include the EU countries.)

It is far higher than the same ratios for the OECD Americas – 26.3% (GDP) and 25.0% (population).[1]

So by the most relevant international standards, New Zealand is a clearly high-tax economy.

Historical comparisons

At around 40% of GDP, government spending in New Zealand is enormous compared to what it was in earlier years.

Before the first World War, central government (mainly current) spending was only a bit over 10% of the economy; in the late 1930s (Michael Joseph Savage's time) it was only about 20%; and it was still around 25% in the 1960s. Local government spending stayed relatively flat at about 3% of GDP through most of this period.

John Maynard Keynes, the economist so much admired by Michael Cullen, thought the upper limit for the size of government was 25% of GDP.

The rise of big government has been a phenomenon only of the last generation.

Has it brought better economic and social performance?

Hardly.

Countries like Germany and Japan grew rich with small governments. They are now struggling to grow at all.

International Monetary Fund economists have also found that the increased size of government has led to a slowing and even a reversal of the improvement in social indicators in industrialised countries.

Comparisons with the proper role of government

Like the framers of the US Constitution, ACT believes in limited government, that is, government limited to its proper roles.

These are to ensure the provision of public goods and a social safety net.

Public goods are the things that must be undertaken by the state or cannot be supplied efficiently in commercial ways, such as national defence, police services and national parks.

The cost of providing these services doesn't come remotely near to 40% of GDP.

A 1997 paper for the Treasury by Australian economist Ted Sieper, who was appointed by Michael Cullen to the government's 2001 Tax Review, estimated that spending on core public goods plus as much as a third of health, education and welfare spending would require central government spending to be no more than 14-15% of GDP.

So on all three comparisons – with well-performing countries abroad, with the share of government in the economy in earlier years and with the proper role of government – Michael Cullen's argument that New Zealand is not a big-government, high-tax economy is spurious.

What did the good people of Waipukurau do to deserve such misinformation?

The debate about tax and spending matters.

US economist James Gwartney has commented: "New Zealand is still a big government welfare state. Government spending continues at nearly 40 percent of GDP, a figure much too large for maximum growth. I do not know of any country that has sustained per capita income growth of 4 percent or more with that level of government spending."

Michael Cullen has never satisfactorily refuted that conclusion, nor responded to the OECD's observation that 95% of base spending in New Zealand is not properly scrutinised. Self-evidently, much of it is not delivering value for money.

On his better days, Cullen knows that growth matters for living standards, particularly those of the poor.

He was big on growth in his earlier budgets, particularly after the government was accused of being anti-growth and anti-business.

In Budget 2001, he said the forecast growth rate for the year to March 2002 of 2.6% – incidentally, about the rate the government is forecasting for the next two years – was "not good enough".

"We need to set ourselves a goal of being back in the top half of the developed world in terms of per capita GDP", he said.

That required lifting growth "to 4% a year or more".

Growth hasn't been lifted to that level – the government's four-year forecasts have annual growth in real GDP falling to 2.8% on average, down from the 3.7% average of the decade to 2003. Annual per capita income growth is projected to fall to 1.9% from 2.5%.

You're not allowed to talk about failure these days. But in NCEA-speak, the government's scorecard is plainly "not achieved".

In this year's budget, growth hardly got a mention. I wonder why?

The goal of achieving Australian income levels or better won't be achieved while New Zealand has a big-spending, high-taxing government.

Nor will the goal of improving public services.

Helen Clark says the electorate will have to choose between better health and education services and lower taxes.

She's wrong.

Ireland has far better public health and education services today because it cut taxes, grew the economy and had more money, not less, to spend on public services.

Helen Clark doesn't understand growth. She doesn't understand the point of President John F Kennedy's comment that "It is a paradoxical truth that tax rates are too high today and tax revenues are too low – and the soundest way to raise revenue in the long run is to cut rates now."

All Helen Clark understands is redistribution. The deteriorating growth outlook for the economy confirms what ACT has been saying: the Government's spending and taxing habits are killing the goose that has been laying the golden eggs.

ACT's policy is clear.

ACT will limit government to its proper roles.

It will do a zero base review of government spending, cut out the waste and then not allow government spending to grow by more than population growth plus inflation, unless taxpayers agree otherwise in a referendum.

Surplus revenue would be returned to taxpayers.

ACT will argue for the 2001 McLeod Tax Review's proposals for a lower, flatter tax structure.

It favours a top personal and company tax rate of 25% and a tax rate of 15% on incomes up to $38,000.

That means a tax cut for every worker and business.

I say to Michael Cullen: "It's great that you're out there defending the chewing gum budget but, don't spread myths and half-truths about spending and tax. Engage honestly in the debate."

Polling is showing that many New Zealanders are fed up with the Government for pocketing most of the 'growth dividend' of recent years.

Instead of being made wards of the state with the Government's Working for Families package, they want tax cuts and cuts in wasteful spending.

They want a debate on tax and spending in the election campaign. ACT says, "bring it on."

ENDS

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