Armstrong on PREFU

John Armstrong does a nice summary:

It was only a few short weeks ago that Bill English was saying he wasn’t going to be spooked by a little bit of red ink in the Government’s accounts.

The Treasury’s pre-election fiscal update bleeds so much of the red stuff that the document looks like the aftermath of Dracula running amok in the blood bank.

The numbers in this horror story are truly awful. It is goodbye to operating surpluses for close to a decade. The forecasts for the separate cash deficit figure nearly double to $6-7 billion for the foreseeable future. Growth slumps. Unemployment jumps. These numbers will almost certainly get worse. The Treasury’s forecasts were done before last week’s maelstrom on Wall Street.

What a legacy to leave behind.

The update is a brutal reality check for parties making big election promises. In the short term, Labour has already gobbled up the allocation for new spending in next year’s Budget. There can be no pre-election bidding wars to buy votes. Post-election negotiations are now going to be hellishly difficult.

Yes – universal student allowances just died yesterday.

If a Labour-Green-NZ First Government was elected, I think they would find it almost impossible to govern without increasing taxes. There is less than $500 million available next year for new initiatives. Even a centre-right Government will find it hard to cope with that. I think it is inevitable there would be a range of new taxes introduced – they will carry through with the legislated tax cuts, but seek to increases taxes elsewhere – maybe even do another envy tax on people earning over $100,000.

In such an atmosphere of restraint, National’s unveiling of its tax cuts tomorrow seem about as tactful as someone cracking open the champagne at a funeral just as the coffin is being lowered into the grave.

The tax cuts needs to countered by savings elsewhere. A significant increase in the operating deficit is not a good idea. However tax cuts are still important as part of a package to life economic growth – higher economic growth is the way to avoid a decade of deficits.

Having slammed National for setting a debt-to-GDP target of 22 per cent, Cullen’s position has been undercut by the current debt ratio being forecast to balloon from 17 per cent to 24 per cent of GDP over the next four years.

And to keep increasing after that to over 30% of GDP.

If National’s tax cuts are reckless, so, by Cullen’s previous definitions, are Labour’s.

Cullen admitted as much by saying that had he known in advance what was going to happen he would have been more cautious about cutting taxes. However, he is refusing to withdraw the second and third phases of Labour’s tax package.

That was actually my question to Dr Cullen – would he have made the tax cuts he did, if he had these forecasts six months ago. He replied that he he would have been more prudent as he leaves recklessness to bloggers 🙂

Cullen is right that he can not directly reverse the tax cuts he has just passed into law. But I just can’t see how a Labour-led Government could live within these fiscal parameters. I suspect there would be a range of new taxes introduced.

That gives National carte blanche to go with its more generous package, which it says will be no more expensive than Labour’s because the extra cost will be funded by transparent savings in government spending.

Yes the key is having the whole package fiscally neutral or very close to it.

The bickering over tax has long made up for the lack of argument over wider economic policy. Yesterday changed everything. The election is no longer about tax. It is about which party can best convince the voters its policies will shorten the length and depth of that recession.

This is absolutely where the debate needs to go. There has to be an real focus on increasing economic growth.