The government is facing challenges, Finance Minister Bill English told the National Party’s Mainland conference at the weekend.
The prospect of economic growth is good but brings with it the challenge of dealing with ongoing surpluses.
The government books scraped into surplus last year but few would have been surprised if they slipped back into deficit given low dairy prices and the various problems facing many of our trading partners.
However, the government is now looking ahead to multi-billion dollar surpluses in the short to medium term which provides the challenge of how best to use that money.
The opposition and the usual other suspects who think the quantity of spending matters more than quality have been calling for increased spending in all sorts of areas. Over at Kiwiblog, David Farrar has calculated that meeting the demands would require a top tax rate of 100%.
But this government has a much better focus than the quantity of spending.As the Finance Minister said: We measure spending by results rather than the level of spending.
Some issues do require more money now in order to reduce future costs and that is why the government has taken an investment approach to social spending with a whole-of-government approach.
At the conference, Justice Minister Amy Adams spoke about this and explained that getting better results in her portfolio didn’t require more money for it. What was needed was spending that addressed the drivers of crime – welfare dependency and poor education and health.
Few would argue with that, but increased surpluses don’t only give the government the ability to spend more, it also has room to take less.
Last week’s announcement that there won’t be tax cuts in this year’s budget disappointed some, but I think most people accept Prime Minister John Key’s view hat there are other priorities this year.
National had looked at around $1 billion for tax cuts in the Budget the year but it was discarded because it would have delivered $7 or $8 a week to many households, Key told Newstalk ZB.
He said the choice they were faced with in the short term was either a billion dollars worth of tax cuts which would deliver a small amount of money to New Zealanders, or spend the money on other things such as cancer drugs.
Labour was, rightly, pilloried for its chewing gum tax cut and this government wouldn’t get any thanks for offering something similar.
However, people won’t be so patient when there’s a prospect of on-going billion dollar surpluses which give the potential for meaningful cuts and the PM gives room for hope:
“Philosophically we believe in lower taxes and smaller government, and government’s definitely getting smaller,” he said.
“The point is if we’re going to have a tax programme – we’re not ruling that out in for 2017 or campaigning on it for a fourth term. But having probably a bigger one, to be blunt.”
When asked how much was needed for meaningful tax cut, Key responded: “$3 billion I reckon.”
He wouldn’t reveal the budget surplus forecast for next year, but it was nowhere near enough for that.
He said it was realistic to forecast the tax cuts without voters considering it a ploy to be re-elected.
Tax thresholds would probably change because of the increase in wages, he explained.
“The average income is going up and we think in a few years time the average income will be say $68,000, well the top rate cuts in at $70,000. If you don’t adjust thresholds over time you get to a point where the average income earner is paying the top personal rate of tax. That can’t be right.” . .
Bracket creep erodes the value of wage rises and needs to be addressed.
Tax cuts also help retirees. Superannuation is linked to after-tax wages. When taxes drop, after-tax wages increase and so do superannuation payments.
A party conference mid-way through a government’s third term could have been subdued. Confidence that the government will rise to the challenges of growth, continue to focus on the quality of its spending and results helped contribute to a buoyant mood.
It’s far better to be dealing with the challenges of growth than those of recession facing many other countries.