Thursday, May 22, 2008

So what should National do?

So after accusing the Nats of wanting to borrow to pay for tax cuts, that’s what Dr Cullen is doing. Going into deficit to give modest tax cuts that STILL mean more tax is collected per person in real terms than was the case than when Labour was elected.

You see, if Dr Cullen had merely spent more to compensate for inflation since he held the Treasury reins, he would have increased spending by only 24.7% according to the Reserve Bank’s own inflation calculator. Now I know it’s a Labour government, you could say, well maybe he could have increased it by double that. No, government spending has increased by four times the amount necessary to make up for inflation since 1999.

Now what should National do? That’s what everyone is wondering. After all will it borrow more than Labour to give back more. Will it cut spending?

I don’t expect much from National, and it typically ensures that I have overestimated that. However , here’s an idea. Let’s say that National had remained in power in 1999. It is a fair assumption that National would have continued pretty much with the policies it had then. If we are to believe the Nats about efficiency in the public sector, then there is little need to grow spending beyond inflation is there? Yes population grows, but spending shouldn’t need to grow beyond that either.

Population growth since 1999 has been 6%, and with the inflationary factor of 25% on top of that, that means in order to maintain a steady state of spending, with no efficiency gains, government spending since 1999 should only have increased nominally by 33.2%. It has increased by 69%.

So National, if it was honestly maintaining the status quo of its policies, should be cutting spending back to where it would have been had it stayed in power.

National’s last full year in power saw total Crown expenses of $33.939 billion. It is now forecast for 2008 to be $57.364 billion. Had spending kept pace with only population and inflation, it should be $45.2 billion. National should be announcing spending cuts of around $12 billion.

What does that mean in tax cuts? Well using the Treasury handy calculations which are admittedly inexact as they don’t take into account the dynamic effect of lower rates generating increasing amount of revenue, this is what you could do:

Implement Dr Cullen’s new thresholds in full immediately ($80k for 39%, $42.5k for 33%, $20k for 21% and the new base rate of 12.5%). That’s $2 billion back in people’s pockets straight away, but that’s hardly enough.

Cut GST to 10%, providing modest relief on fuel and food prices to everyone. Another $1.7 billion

Abolish the 39% envy income tax rate introduced by Labour and cut the 33% rate to 25% along with company tax. A whopping $4.2 billion back to individuals and businesses.

Drop the 21% rate altogether down to the new lower 12.5% rate. Another $3.3 billion.

All up a tax cut of just short of $12 billion. You’d have company tax below Australia’s level at 25%, you’d have a two tier income tax structure with a rate of 12.5% up to $42,500 and 25% above that. GST would be down to a simpler 10%. Think how much more competitive that would look, think how kiwis in Australia and elsewhere may go, hmmm keeping 75% of my income instead of 60%. By the way ACT advocates might note that this goes beyond ACT tax policy from the last election , which advocated 25 and 15% as two tier rates, and no cut in GST.

That’s just if National had been prudent and spent no greater than inflation and population growth since 1999.

So do you think National will get that? Or is it addicted to pork as well? Was the government underspending in 1999 so much, or would you rather it spend like it was then and give you back the surplus? Are you getting value for money that means you'd rather pay the tax you spend now, rather than 12.5% on the first $42,500 and 25% on every dollar above (and a little less on goods and services)? Oh and don't mention roads, I haven't even touched fuel tax.

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