Paula gets through the spin

Some astute analysis by Paula Oliver in the Herald:

Dr Cullen is arguing his tax cuts will meet four carefully worded tests he has thrown into the media – they won’t require borrowing, they won’t exacerbate inflationary pressures, they won’t lead to greater inequality and they won’t require cuts to public services.

But the fact is that when taxes are cut by any amount, however big or small, that amount automatically becomes money that could have been used for something else.

I am bemused as Dr Cullen tries to almost con the country that he has invented a special sort of tax cut which is magically immune from affecting borrowing, inflation or spending priorities.

Paula Oliver correctly notes it is all about priorities and opportunity cost.

Now I am a supporter of a balanced approach to spending and tax. As the economy grows, and the tax take grows, I advocate you put some of it into extra spending and some of it into tax relief. Labour for eight years has been almost 100% into extra spending and 0% into reducing personal tax. ACT seem to be currently advocating 0% into extra spending and 100% into reducing tax. I’ve left the savings side of things out of it for now for simplicity sake – just focusing on spending and tax relief shows the contrast.
Now getting back to Paula’s article, both Labour’s and National’s tax cuts will not require borrowing, in that NZ has a surplus which is more than large enough to cover a reduction in tax. But if one had no tax cuts at all, then the surplus would be larger and debt would fall.  So Dr Cullen trying to pretend his tax cuts are somehow immune from being part of a trade off is silly.

Now again I support a balanced approach. When debt was like it was in 1990, the priority was getting it down. Hell we were near bankrupt and facing massive deficits. But debt today is incredibly low, and almost non existent in terms of net debt. So as long as the structural operating surplus (OBEGAL) remains positive (I personally advocate a 1% of GDP surplus, after provision for Super Fund contribution), it doesn’t matter if gross debt flucutates up and down a bit over the years to reflect capital investment etc.