What (electoral) price a tax cut?

It will be a self-satisfied Michael Cullen presenting his third Budget on May 23. And with some cause: he has won a major argument.

Bill English has fallen into line on what is “prudent” debt. His fiscal policy, like Cullen’s, is now predicated on net debt of around today’s level, about 20 per cent of GDP. That ends the 1990s Bill Birch drive for ever-lower government debt.

There is a difference, of course, a big one. Cullen is, in theory, salting away funds to meet baby-boomers’ big drain on pension funds after 2020. English proposes to abolish that fund.

The Cullen plan in theory allows pensions to be maintained without raising taxes or debt or cutting spending. English’s legacy for the ageing baby-boomers, will, in theory, be higher debt or higher taxes or spending cuts. His counter on that will be — in a term or two when public opinion has evolved — a system of individualised accounts, part state-funded, which could customise health and upskilling, as well as fund old age.

Meantime, English argues, lower taxes now will grow the economy faster so we should all be better-off and better able to look after ourselves.

Cullen has committed himself not to raise personal, corporate and GST taxes, though has left himself free to raise excise and environmental taxes. English has committed himself to lowering personal tax (by amputating Cullen’s top-end 6c) and corporate tax (to 30c) in a future National government’s first term, with more cuts in a second term.

At the same time English insists he can maintain health and other social spending because abolishing the super fund allows him to run lower Budget surpluses than Cullen, who needs nearly $2 billion a year extra surplus to cover the fund.

Cullen’s counter is: “What will you cut, Bill?” To which English will answer: “Nothing.” To which Cullen can riposte: “You are cutting future super. Tell that to the 50-somethings.” And so it will go, round and round.

But there is a deeper political argument and it’s all to do with timescales.

Cullen can point in his favour to the Dutch and the British. The Dutch have confounded orthodox economics with high growth, low inflation, low unemployment — and high taxes.

In Britain the Tories in the last election were scared off a tax-cutting line because it ran into “what services will you cut” return-fire. Now the Blair Labour government (which in its first term surreptitiously lifted the tax take even while cutting rates) is expected to raise tax in its 2002 Budget.

What lesson is to be drawn from that? Some British commentators reckon the day has passed when tax cuts were king. If those commentators are right — and, indeed, the 39c tax rate here does not seem to be a big, even sleeping, electoral issue this year — English is on spongy ground.

He can point to two differences.

One is immediate: the state of services is different. In Britain the decrepit state of the (privatised) railways lowers the quality of life; the nationalised National Health Service is widely agreed to be a disgrace. Here, while there is disquiet over health, that disquiet is not as intense as in Britain. And railways here are not a household issue since few people travel on them. So Cullen’s line may not have the same power here as Blair’s in Britain.

English’s second difference is longer term: that under-45s think differently. They have spent all or most of their adult life under Rogernomics and don’t have the over-45s’ benign view of the state.

English represents the under-45s, of whom he is one. Cullen represents the over-45s, of whom he is one.

If English is right, the generation gap is on his side. He is the future and Cullen is the past. And in due course in politics the future wins.

But not yet. Tax cuts might win some votes this year but not enough, on present indications, to give English the chance to put them into effect. Worse, if Cullen can scare voters about health and education cuts, tax cut promises might boomerang in middle New Zealand.

But there is short-term method in tax cuts. Coming off 30 per cent of the vote in 1999 and low polling since, English does not have the luxury of shopping for converts from Labour. He has to shore up his core vote — particularly the vote of small businesspeople, whom ACT is targeting. Among them tax cuts should work.