Political parties don’t always like facts to get in the way of rousing rhetoric, but it is usually useful to start with the facts, says economist Peter Harris – Article originally from 2005

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This election year, tax cuts are shaping up as a key issue. Parties promising them usually say they will finance them by government spending cuts: of “pencil pushers” (to use one phrase) rather than of basic services.

The facts though, tell a different story.

Government spending is not getting out of hand. Far from it.

The facts are:

- The size of the total public sector in New Zealand, compared to the size of the economy as a whole is significantly smaller than for developed countries as a whole (that is, countries belonging to the OECD).

- In 1999, the relative size of the state in New Zealand was above the OECD average; by 2004 it was significantly below that average.

- In 1999, central government spending was 33.3 percent of GDP: it is now 30.1 percent. There has been a three percentage point decline, or a 10 per cent fall in the relative size of central government.

- In 1999, gross Crown debt was 35.4 percent of GDP: it is now 25.3 percent.

On any sensible basis of comparison, there has been no spending blow-out.

Opposition parties say they will protect basic services, and only cut core government spending.

The facts are:

- Social security (including NZ Superannuation) health, education, defence and law and order absorb 77 per cent of government spending: there is no room in the “core” for major cuts.

- Core government spending accounts for only 4.3 per cent of total spending.

- The main opposition parties have already committed to extra spending on areas such as roading, prisons, law and order, policing, defence, aged care and many others: promises that easily add to an amount equivalent to the existing core spending.

It is inevitable that spending cuts – if they are to be the source of tax cuts – will eat into social services like pensions, health and education, as well as putting at risk the vital tasks of administering a developed, civilized society.

Australia is held up as an example to follow with tax cuts.

Despite the hype, the facts are that even after the Australian tax cuts:

- Personal tax on a wage equivalent to one or one and a half times the New Zealand average wage still absorbs the same percentage of the pay packet.

- Australia will have two marginal tax rates (42 and 47 percent) that are substantially higher than the top New Zealand rate of 39 percent, and they pay a 1.5 percent Medicare levy on top of that!

- People earning up to A$58,000 get a maximum tax cut of only $6 a week (but those above A$125,000 get $87!)

The Australian tax cuts cost an enormous amount of money (an average of A$5.4 billion a year), and delivered very little to the vast bulk of taxpayers.

It is said that government surpluses are large enough to afford tax cuts.

The government may be running surpluses, but it still has to find cash to put into the NZ Superannuation Fund, pay for the hospitals that are being rebuilt, finance new roading projects, generate the cash needed to distribute as student loans, and so on.

Next year, there will be no cash surplus, and over the next three years the government will increase its borrowing by around $1,100 million a year on average.

Any tax cuts will increase Crown debt. The only remaining questions are by how much and how quickly.

Tax cuts are also likely to provoke an interest rate increase as the Reserve Bank offsets their potential effects on inflation.

What the tax cuts “package” effectively offers.

- More money to people who don’t really need it.

- Rising interest rates for the battlers in the mortgage belt.

- A reversal of the hard won gains from rebuilding and rebalancing a supportive set of state services.

-Higher public debt, which will, in future, draw off government revenue that could otherwise have gone in providing effective services to the public.

Public services are easy targets in an election year.

The state sector in general, and public services in particular, are easy targets in an election year.

This election is no exception. Political parties often try to have things both ways: arguing, for example, for more staffing of 111 call centres, better pay for the armed forces, longer prison sentences, more effective services for at-risk children, stronger protections against incursions of pests and animal diseases, smaller class sizes, more research support to industry, shorter hospital waiting lists and so on – but then claiming that cutting public services can fund pet projects or tax cuts.

These parties don’t like facts to get in the way of rousing rhetoric, but it is usually useful to start with the facts.

Breakout quote

“It is inevitable that the spending cuts will eat into social services like pensions, health and education, as well as putting at risk the vital tasks of administering a developed, civilized society.”

The public service accounts for only 15.5 per cent of public sector employment. Public services incorporate:

- Vital services such as courts and justice, border protection and biosecurity, maritime safety, environmental protection, land transpoort safety.

- The services that are central to the administration of our society such as collecting taxes, paying benefits, passing laws, regulating consumer protections.

- The services that are central to sustaining economic progress including science and research, tourist promotion, support for exporters, promoting our culture and heritage and the film industry.

ENDS

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