OnPoint by Keith Ng


Budget 2010: What’d you expect?

This is a tax cut for the rich, yes, but I struggle to get too worked up about it. Key said it was a tax cut for the rich, National campaigned on tax cuts for the rich and people elected them to give tax cuts to the rich. Meh, this is how governments work.

However, there are some major deceits in today’s Budget:

The “tax switch” is not revenue neutral

How can everyone get more money without the government losing money? It’s Macroeconomics, stupid.

This is actually a tax cut. It will cost $1.085b in the next four years. The only reason they can say it’s “revenue positive” by 2013/14 is by adding a line called “Adjustment for macroeconomic effects”. That is, they argue that tax cuts will spur economic growth, and therefore the economy will grow faster, and so it’ll be revenue positive by 2013/14.

It would be unfair to call this magic money, but at the very least, it’s entirely theoretical money. Not only can we not know whether it’s real or not now, but we won’t know whether it’s real or not in 2013/14.

Ah, macroeconomics. You are always (by definition) right.

Budget 2010 does not reduce long-term debt

English was very careful to say that debt decreased “as a result of policy decisions” in Budget 2009, and it has gone down further in Budget 2010. That’s because the “debt reduction” in Budget 2010 is a consequence of a better economic outlook, and has little to do with policy changes in this Budget. English confirmed this to me in the Lock-Up.

Of course, the debt reduction programme in Budget 2009 was problematic for its own reasons.

Of course it’s a tax cut for the rich

There’re some half-arsed and far-stretched arguments about why this isn’t a tax cut for the rich.

First, they’ve been bandying around graphs showing that households earning more than $85k/year only get twice as much of a tax cut as households on $40k-85k… when you compare the “tax changes as % of the average disposable household income”. Of course, rich households have a much higher income (well above $85k), and so in real dollar terms, rich households get about four times as much as average households.

Their second equity line is: “Two-thirds of the tax cut goes into reducing the bottom two brackets.”

People on higher income take a bite out of the low bracket cuts *and* the high bracket cuts. Even very high income earners have a “first $14,000” of income. Yes, a large chunk of the package goes to low bracket cuts, but a good chunk of this goes to high income earners. Which is why it’s stupid to talk about low brackets, and you’d only do it if you were deliberately trying to mislead.


The big surprise is, as everyone else will no doubt point out, the unexpectedly large cut in the second rate, from 21% to 17.5%. This, together with the changes to super and benefits, does a very effective job in compensating for the impact of GST. I need to spend more quality nerd time on it, but I reckon it will pass the test in that regard.

Their objective was to make the tax system less progressive and to shift taxes away from income and corporate tax, and they’ve managed to do it in a pretty reasonable way.

But spending is still the outstanding issue – as I wrote at the beginning of the year, the permanent constraint on spending will loom over all future budgets. They’ve managed to free up money by “cutting out the fat” this year, but once they’ve cut out all the fat, can they cut out all the fat again? And again?

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