by frog
I asked at the beginning of the year how each party might respond to a recession. The Herald gives National’s answer today on it’s front page – pretend it’s not happening:
Despite global financial turmoil, National’s finance spokesman, Bill English, has indicated the party is still considering tax cuts of $50 a week.
Asked on Radio New Zealand whether cuts of that magnitude were still on the table, Mr English replied: “It will be around those expectations.”
His comment comes just before the next Treasury quarterly report is expected to show a recession, and follows ongoing ructions in the United States with the bankruptcy announcement of investment bank Lehman Brothers and forced sale of Merrill Lynch to the Bank of America.
Of course Cullen has not helped this by by emptying the state piggy bank with his own tax cuts before English can get his hands on it:
Finance Minister Michael Cullen yesterday sent the country a further warning that the Government’s cupboard was bare, saying the pre-election fiscal update was expected to show “significantly worse” deficits than the $3.5 billion forecast in the Budget.
It seems bizarre that, as our economy, and indeed the world economy, enters this recession we are going to replay last election’s bribe-orama game again. We need to be investing in sustainable infrastructure, local jobs and businesses and protecting those who will be hurt most in a downturn. Tax cuts achieve none of those things. As we have seen before they come at the expense of borrowing or cuts to services that New Zealanders value; services like universal free health and education.
Published in Economy, Work, & Welfare by frog on Tue, September 16th, 2008
Tags: Bill English, borrowing, Michael Cullen, recession, tax cuts
on the trolls and those who are unable to keep on topic
The crashing sound in the financial markets puts things in context for me.
Interest rates are supposed to be a measure of risk. But in recent years they have instead been used as monetary tools for manipulating the economy. Regardless of risk, rates are cut to spur the economy. Under Alan Greenspan’s watch in the US it becomes apparent now that he was encouraging lendors to perform the financial equivalent of walking naked in a blizzard…..oblivious to risk and instead besotted with growth as though risk did not exist.
It seems to me that there has been an imbalance between the risk vs monetary considerations for some considerable time. Perhaps this is the fatal flaw at the core of monetarism combined with free markets. They aren’t good partners without close and EFFECTIVE regulation. Instead, the regulators appear to have been captured or neutralised by those organisations they are supposed to regulate, drawing their people form them. Thus they are rendered ineffective except when the flaws can’t be concealed any longer….and the red ink sweeps over the tops of the dams.
These events cut to the heart of the current economic and financial orthodoxy. Five gold stars to the party that sees it first. One can be fairly certain it won’t be National as they still haven’t caught up up with events a decade old. never mind yesterday.
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Frog, while tax cuts may not achieve what you are aiming, you are going to have to accept, we are going to need them as an incentive to stop people from moving to Australia. The situation is so bad now that not only do you have higher wages, but you also need to earn something like $200,000 in New Zealand to pay less taxes than you would in Australia. The wage and tax differential is the main reason why we are losing people.
Of course, the money for tax cuts can come from a simple measure, getting rid of Working for Families. In my view, WFF is a measure to expand welfare dependency to the middle classes, and therefore ensure Labour obtain a new generation of voters dependent on voting for them. It would be far better to get rid of that programme, and replace it with a zero tax bracket (like you lot are advocating), but instead have it at let us say $10,000 or $20,000. That would cut the tax differential with Australia, and it would only be the wage differential that would need to be dealt with.
Furthermore, the last time New Zealand had tax cuts was as we were entering into a recession; we had a couple of years of budget deficits, but look what happened – the economy recovered, and we got the money back plus a little more (and we would not have needed Cullen’s envy tax either).
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Did you see Agenda expose the “NZers leaving for Australia myth” last weekend?
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OutInFront,
You do have a point: too much money supply encourages people to take more risks. But it’s not that simple.
Interest rates reported in the papers are usually a measure of the availability of money. They’re “base” rates – rates that assume no risk. Usually only governments get to borrow at those rates, and even then it depends on the govt. The amount of interest you will actually pay depends on the base market rate plus some, and the “plus some” depends on how risky a bet you are. That’s why these NZ finance companies which have collapsed paid such high interest rates – because they were very risky.
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I don’t like National’s tax cut plans. But this cyclical recession is no reason to stop them.
In a recession it is appropriate for a govt to run a deficit. And in a boom it is appropriate for a govt to run a surplus.
Running a govt deficit pushes the economy along in the short term. Running a govt surplus slows it down in the short term. Capitalist economies tend towards a boom-bust cycle that’s harmful, and you want to smooth that out and get things just humming along.
I could give reasons relating to inflation or growth but lets talk jobs instead: in a boom there are not enough workers, in a bust there is unemployment, so it’s best to just be humming along and avoid both extremes.
My concern is that a newly elected National govt will throw open the budget books and announce that they are shocked, Shocked, SHOCKED to discover that there is a recession! And that this means, that , oh so unexpectedly, they’ll need to cut govt services.
Once you lose doctors, scientists and teachers overseas it’s hard to get them back. National’s last set of cuts to the public sector when they were in office in the 90s have taken a very long time to heal.
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“that would cut the tax differential with Australia,”
Australians pay more tax that Kiwis.
They’ve got a whole extra level of taxation (the State govts, which do a lot) as well as federal income tax, and they’ve lots of indirect taxes (stamp duty on selling property, etc). So comparison at the individual level is hard.
So to compare you can look at overall amount of tax collected, and compare it to the size of the economy, and see that the Aussies are paying a greater % of their dosh to the govt than Kiwis are.
Of course you can find examples of people who’d pay more, or less, under each tax regime because they’re different.
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Frog
If you think we need to “protect those who hurt the most in a downturn” I hope you realise that the group that will hurt the most are the middle class.
I suspect that you did not mean that when you made that comment, I also suspect that “protecting” people is green speak for giving more money to the bludgers.
When we have a recession the first thing that should be cut is welfare, the savings should then be passed on to the tax payer.
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“So to compare you can look at overall amount of tax collected, and compare it to the size of the economy, and see that the Aussies are paying a greater % of their dosh to the govt than Kiwis are.”
Actually, if I recall correctly, Australian Government expenditure is less as a percentage of GDP than in New Zealand. Certainly the ACT Party is implying such in their twenty point scheme.
“Australians pay more tax that Kiwis.”
Not in income tax. That is what most people look at when they are considering a move to Australia. They don’t look at Stamp Duty, and all that other stuff.
“Did you see Agenda expose the “NZers leaving for Australia myth? last weekend?”
Sorry, it ain’t a myth. There are so many New Zealanders in Australia now that at Saturday’s Bledisloe Cup match, the stadium was about 50/50 All Black/Wallaby supporters – why? Because there are so many Kiwis in Brisbane now. Perhaps the numbers at the edges are being slightly exaggerated, but the point still remains – we are hemorrhaging people to Australia and we need to deal to it before the joke becomes – the last person to leave the country, please turn off the lights.
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john-ston – Good strong, statistical, researched response:
Um, is it because Kiwi’s care about rugby more than Queenslanders?
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Big Bro … try playing Monopoly without picking up $200 every time you pass go. Doesn’t work. Welfare cuts boost crime. Simple as that. I’d have thought a reactionary self-promoter such as yourself would have considered that.
Johnstone: tax cuts will never keep any intelligent person in New Zealand. Indeed – intelligent New Zealanders leave, come back, go away again, and draw on a wide variety of international experiences. Anyone who wanted to end that would be hell bent on sending NZ further back into the dark ages than we are already.
… if I hear one more person mounting this pathetic veneer of a public policy argument to veil their own self-interest I’ll puke.
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Icehawk: *SNAP* on National expressing surprise that we’re in a recession. Nice posts.
So, since you obviously know something about it, what might be the impact on NZ of American banks go bye-byes?
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frog, That means john-ston has passed the first hurdle to becoming an MP
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Paradox said: … try playing Monopoly without picking up $200 every time you pass go.
Or try playing this version…
Same result!
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If National is going to resuscitate the economy through this recession, they really need to move on from their 1990s policy of hands-off, let it burn, monetarism. What good will tax cuts do in the long term when most of it will go straight to the Aussie banks to pay off debt?
Eventually given the massive amount NZers have borrowed there will be no realistic option but for a tsunami of bad debts to be written off. The housing bubble should never have been allowed to happen, but the correct response to it bursting is not to throw good money after bad! The Chch city council just bought some wasteland off a broke property developer at massive cost- why? Ratepayers should be asking serious questions about this kind of bailout.
Surely a more appropriate response to the severe recession that is now almost certain is a Keynesian infrastructure build- the government should spend up large on communications, electricity, rail, roads, ports, education & training etc which increase the future productivity of the economy and keep skilled people in work.
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So make sure the poorest and their kids get hit the hardest for how many extra dollars a week big bro? Sounds like a plan.
250,000 NZers on the UB, DPB, sickness and invalid benefits = 5% of the population. If we take $20 a week off them (they’d just spend it on food and bills) = $5 million dollars. Spread that over the rest of the taxpayers (say 2.5 million) and thats $2 a week extra! Recession proof.
Think first next time?
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big bro: When we have a recession the first thing that should be cut is welfare, the savings should then be passed on to the tax payer.
This is a proven recipe for depression.
The lack of a welfare safety net in the US in the late 1920s and early 30s was a direct cause of the downward spiral there. Roosevelt’s investment in social capital reversed that and war – central planning and effectively industrial ‘welfare” – ended the depression.
Know your history, please. Ignorance is painful to watch.
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I’m no fan of Bill Clinton, but the one thing he got right was to end the Republicans trickle down approach and create a demand economy by ensuring any tax cuts or other stimulus went to the economic bottom half of the population. People with not enough do not save or invest overseas, they send it right back into the local economy. This played a major part in creating the boom in the 90′s.
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uk kiwi:
“(Christchurch) Ratepayers should be asking serious questions about this kind of bailout.”
They have been!
The justifications seem to have been accepted by some people “in the know” about the Central City and the Property Market … in the name of “needing to revitalize” that area.
Personally I decided to shrug my shoulders and leave them to it! It is probably OK and I’m more interested in conserving natural features rather than relatively “old” but unremarkable buildings.
(A couple of decades ago I played an effective role in the saving of the former Convent in Barbadoes Street … which is now the “Music Centre of Christchurch” and the home of the Christchurch School of Music and other organizations … it was more than exhausting, so I feel I’ve done my share!)
e
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My take on this John-ston, is that if it were not for the alterations that WFF makes in the equation I would still be paying a 90% effective marginal tax on my next dollar earned. While the guy on 200k pays 39%… you want to take that away and give me a tax cut of equal size in its place, but instead of being just families that get it, everyone does? You have a way to pay for that? Nope.
Some serious alterations to the tax structure here would be required, including a couple more tax brackets and a more integrated curve… and you can take away WFF if you add in income splitting but don’t give me this utter cr@p about WFF being welfare for the middle class. The whole tax structure is supported, almost in its entirety, but the middle class. That IS why people leave here Icehawk. That and the absurd business with investing in houses. It isn’t an investment of any value to the country if it doesn’t produce anything, and except for mortgage interest payments to Oz, the housing investment market here hasn’t produced jack.
respectfully
BJ
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Paradox Says:
September 16th, 2008 at 11:04 am
Big Bro … try playing Monopoly without picking up $200 every time you pass go. Doesn’t work. Welfare cuts boost crime. Simple as that. I’d have thought a reactionary self-promoter such as yourself would have considered that.
……………………….
There is also an argument that welfare can lead to crime, by creating a subculture who exsist anyway other than by working.
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I wonder how different states compare in Australia?
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I just happend to be reading this:
Let’s begin with tax. The home of Marxism has a flat personal income tax scale – a rate of 13% !! This rate was implemented by Putin in 2001. Combined with a GST of 18%, a tax on dividends of 9% and a corporate tax rate of 24% it can be seen that under Putin there have been big steps to encourage entrepreneurship, as the futility of making anyone better off through progressive taxes has been admitted. Michael Cullen take note.
In fact flat rates of income tax are now commonplace in Europe – in earlier columns I mentioned what we’d seen in Iceland and the Baltic States. Makes you wonder for how much longer New Zealand will trail the world on tax design. Perhaps now we’re the first into recession, an understanding of the counter-productive impact of progressive tax will reach our shores.
http://articles.garethmorgan.com/from-russia-with-love_1180.html
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Um, thanks, that article really made me want to copy Russia.
For another view, see http://www.commondreams.org/view/2008/09/15-6, wherein it is discussed how the biggest prolonged period of growth in the US occurred at the same time as the top tax rate was over 86%.
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jh: Tax is a red herring. Sure, taxes that take almost everything discourage activity. lack of taxes results in gross inequities in wealth and – more importantly – opportunities to create wealth. Those with wealth monopolise the opportunities (barriers to entry – political and economic) and defeat small upstarts (unfair competition to maintain their effective monopoly / oligopoly).
I’m amazed anyone even has this debate as the history could not be more clear: The most prosperous period in all human history began with the introduction of progressive tax rates allied with democracy and (mostly) respect for the law.
The top countries in the OECD have some of the highest tax rates in the world. The worst countries overall economically of all countries have some of the lowest – or no – tax rates. In each case, there will be exceptions that people arguing the cross-current will point to (and ignore those that don’t).
Mob-ridden Russia, teetering on the edge of dictatorship in an effort to cope, isn’t a good example of….much at all…..other than perhaps the dire consequences of rapid deregulation of a formerly restricted economy.
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