Party differences clear to see
Should surplus go towards tax cuts or more social spending?
How the fiscal priorities of National and Labour diverge, and how much they overlap, are clear now Labour has released its alternative families package.
The lion’s share of the $2 billion package the Government announced in the May Budget went to tax cuts, in the form of adjustments to the two lower bracket thresholds. But there were also increases in Working for Families (WfF) tax credits and the accommodation supplement.
Labour would scrap the tax cuts, allowing it to double down on the increase in WfF and throw in an extra $300 million in support for parents of children under three. It keeps the increase in the accommodation supplement, allocates an extra $374m to superannuitants and beneficiaries to help meet winter power bills, and has $600m left over to spend on housing, health, education and other priorities.
That this debate is even possible reflects the fact the Government’s accounts are back in the black and public debt is shrinking — at least relative to the size of the economy that has to support it. National’s stewardship of the public purse is a key plank of its electoral pitch.
The question, though, is how has the surplus been achieved, and at what cost?
Much of it is cyclical. We have gone from the double whammy of the worst recession since the 1970s and the Canterbury earthquakes to a combination of the most favourable mix of export and import prices for decades, exceptionally rapid population growth and exceptionally low interest rates. None of those can be expected to continue indefinitely.
But on the policy front, the return to surplus has reflected the combined effects of bracket creep on the revenue side of the ledger and a tight rein on spending.
By April next year, when the budgeted adjustment to income tax thresholds is scheduled to kick in — voters permitting — we will have had 71⁄ years of fiscal drag as inflation drives a growing share of income into higher tax brackets.
The changes foreshadowed in the Budget only partially redress that stealth tax increase. The rise in the lowest threshold more than compensates for inflation since the 2010 tax changes; the rise in the middle one doesn’t quite do so; and the $70,000 threshold for the top bracket (where one taxpayer in five and 62 per cent of the income tax take are to be found) is left where it is, capping the potential tax cut at just over $1000 a year. The policy, in short, is less regressive than Labour makes it out to be.
But the bigger policy influence on the fiscal bottom line has come from spending restraint.
The fairest indicator of that, if you want to compare National’s record with the previous Labour-led Government’s, is to look at spending adjusted for inflation and population growth. Time series compiled by Derek Gill at the NZ Institute of Economic Research and Toby Moore at Victoria University of Wellington allow us to do that.
In real per capita terms, the average spending over the current Government’s nine years in office (including the Budget for the fiscal year that has just begun) is 11.7 per cent lower than it was during Labour’s nine years.
How much of that reduction is wasteful spending that has been identified and eliminated?
And how much is the kind of spending cuts that leave social scar tissue?
It is on that issue that the two sides of politics divide.
The $600m or so Labour’s package frees up for public spending is only part of the fiscal headroom it expects to have for more expenditure.
The Treasury’s projections, which include National’s planned tax cuts next year, have government revenue wobbling in a narrow range around 30 per cent of GDP over the next 10 years, while spending continues to shrink from 28.8 per cent of GDP now to 27.2 per cent over the next five years.
The Budget responsibility rules that Labour and the Greens have agreed on envisage a spending limit of 30 per cent of GDP.
Finance Minister Steven Joyce has been emphasising that while the Budget forecasts growing surpluses in the operating balance before gains and losses, a jump in capital spending on infrastructure is set to keep net cashflow roughly in balance and the ratio of net debt to growing nominal GDP continuing to decline.
Currently, that ratio is 23 per cent of GDP (when the rich country average is 71 per cent), and National’s target is to drive it down to 10-15 per cent of GDP by the middle of the 2020s.
Labour and the Greens have set a target of 20 per cent in five years.
So there is a widening gap between the spending and debt trajectories of National on the one hand and Labour and the Greens on the other.
Joyce depicts the net $600m a year available for public spending under Labour’s plan as “fleecing Kiwi families of $2.5b over the next four years”.
But the economic incidence of income tax changes is complex. Some employers might respond to income tax cuts by saying: “I was prepared to pay x amount gross to secure your services. If you get to keep more of that, good on you.” Others might say: “It will now cost me less to deliver you the same take-home pay. Yippee for me.”
In practice, it tends to be a combination of those two effects. Which is stronger will differ case by case, depending on whether your corner of the labour market is a seller’s or a buyer’s market.
Both the National and Labour packages increase Working for Families and the accommodation supplement.
But WfF (the in-work tax credit at least) is an indication that some employers are able to get away with paying less than an employee needs to raise a family on, so taxpayer support is required. What is wrong with that picture?
Likewise, where rental markets are tight, the accommodation supplement flows through to landlords and increases the amount it is rational for them to pay for an investment property.
These subsidies testify to a degree of dysfunction in the labour and housing markets respectively — structural problems that cry out for remedy.