How to spend those big surpluses

There is a large fiscal surplus. Or is there? That question hangs over this month’s budget. Or rather, next year’s.

The lid stays on for now, more or less. Helen Clark has been spooked by the British Labour government’s plight: spending programmes committed on forecasts of economic growth and revenue which have not materialised.

So the government will wait another year before demonstrating its social democratic credentials. This year’s budget will contain relatively modest new spending: $1 billion, the Budget Policy Statement in December said.

Contrast this with ACT’s gung-ho largesse. Leader Richard Prebble’s weekly Monday “Letter” said a few weeks back: “Government surplus is now on track to be $4 billion. That’s 3.1% of GDP! If government gave back all the over-taxing it would be more than $2000 per household.”

There are ideological and temperamental gulfs between the spending-oriented but fiscally conservative Clark and the fiscally rumbustious, tax-cutting Prebble. But there is also the kernel of a practical difference.

First, the government has tied its hands with its commitment to lock up $2 billion a year in the Michael Cullen super fund. Moreover, that fund will chew up more than originally planned if it is to serve its intended purpose.

The rate of return on which the Treasury first calculated contributions was based on the rollicking 1990s when yields were historically high. Yields are more modest in the post-dot-com 2000s. The Treasury has now cut its projected rate of return. So higher deposits by the taxpayer are required if the fund is to be fully funded.

ACT, National and the Greens, all for different reasons, think the real return to the country and future old people would be greater if the money was used here and now than if it is bet on the world’s equity and bond markets.

The second practical difference is a Cullen sleight of hand.

Remember 1999 when Labour promised only 5 per cent would pay its 6c impost on incomes over $60,000? Well, it is no longer 5 per cent: price and wage inflation have lifted many more above $60,000.

The same thing is happening lower down the scale. Those on average earnings crept into the 33c tax bracket in the 2002-03 financial year. Average annual earnings were $38,260 in the 12 months to November. The threshold is $38,000.

So our old friend fiscal creep, which played havoc with household finances in Sir Robert Muldoon’s inflationary early 1980s, is back. It is providing part, albeit a modest part, of the unexpectedly high surpluses.

An honest government would give that back by indexing the thresholds to wage and salary movements or would spell out how much extra it is taking as a result.

But Cullen has other plans for your money. He wants to spend it on worthy social democratic projects to reduce social inequalities. Next year, if revenues materialise according to Treasury projections, his budget will begin to realise those projects. Labour party members don’t draft remits in draughty halls for nothing.

Top of the list is Social Services Minister Steve Maharey’s bid for “social investment”.

This is a Canadian notion which reframes “welfare” from a palliative which is a drain on the economy into “investment” which gets people working and eventually produces an economic return.

Pilots have begun with solo parents and invalids, aimed not just at getting beneficiaries into jobs but ensuring they are financially underpinned in the initial stages of work — by continuing to pay their benefits for a time (initially three weeks) and ensuring they have travel-to-work money, debts are cleared and so on, so that they get real monetary benefit from work compared with the benefit and so stay in work.

This is expensive. So is its companion measure: a unified benefit to cut the administrative costs and confusion of the present complex mishmash and to incorporate family tax credits into one “kids, families and work” package. Total cost is maybe $500 million.

Then there is health. Getting the primary health organisations fully running is also expensive. That is why health gets nearly half the new spending this year.

Then there is the extension of parental leave to 14 weeks. And a raft of other union-friendly projects. Cullen has a lot of friends to please and next year is payoff year.

If the money is there. What if Iraq and SARS and faltering fundamentals stall the world economy and the revenues and surpluses don’t materialise? That would be a real test of Labour’s fiscal mettle.