Trad Labour plus prudence and skill

Traditional Labour, within the constraints of prudent budgeting and with genuflections to a high-skill economy: that’s Michael Cullen’s fourth Budget.

And, in case you haven’t got the message by now he made two strong points at his press conference:

* On present projections he will have an additional $500 million or so to spend next year and that is earmarked for tax credits for low-income families and assisting beneficiaries into work.

* Budgets are not the place to deal with business’s wishes for a better Resource Management Act and other such gripes. They are also not the place for corporate or upper-income tax cuts. He is not interested in thinly spread tax cuts, as Peter Costello has just provided in Australia (even if they do little more than keep the thresholds in line with inflation). Cullen is interested in “targeted” spending.

So what are Budgets for?

This Budget illustrates three points about Cullen the keeper of the exchequer.

First, he is determined to keep the Budget in surplus and to ride debt down. On his central economic scenario his surpluses rise year after year (after a small dip in 2003-04) to $6.2 billion in 2006-07 — and that is on relatively modest growth projections of 2.1 per cent, 3.5 per cent, 2.8 per cent and 2.8 per cent in the years to June from 2003-04 to 2006-07.

And gross debt drops away. In his first term Cullen developed a focus on keeping gross government debt to around 30 per cent of GDP (as a way of setting a parameter on capital spending). Now he has a bias to reducing debt: “Given prudential management with a margin for risk, the bias is more against increasing debt than lowering it so that there will be a natural tendency for the gross debt percentage to trend downwards over time.”

His projections show debt falling from 27.3 per cent this year to 23 per cent in 2007.

Debt won’t get that low, of course — thanks to Cullen’s second characteristic. That is a propensity to spend on social services and assistance. This Budget is redolent of that.

So health gets $711 million more, $311 million more than the $400 million package announced last year, of which about $100 million is due to changing demographics a. Education gets $222 million in new initiatives. Housing assistance gets $260 million over four years. Add to that the $500 million earmarked for low-income families next year.

That is a traditional Labour government in action. The difference with the last traditional Labour government, the profligate Kirk cabinet of 30 years ago, is that the spending is within prudent financial parameters.

And that means some of its supporters, in the unions, the charities and voluntary sector, think it is miserly — the Greens’ line yesterday.

National leader Bill English thinks so too. He wants some of the surplus given back in tax cuts. Cullen’s fiscal conservatism, English told Parliament yesterday, is costing taxpayers and business and causing “sclerosis in the arteries of the economy”.

It is at the very least costing taxpayers more. Cullen refuses even to index the thresholds to stop bracket creep biting deeper into incomes as they rise. According to official statistics, someone on average earnings is now $664 into the 33 per cent tax bracket. Quite apart from petrol, tobacco and alcohol tax rises, income tax is rising yearly.

Bracket creep also adds to the gradually rising redistribution, which is at the heart of this Budget.

But there is a second constraint on the social redistribution: recognition of the need to get the growth rate up and keep it up to meet the government’s social ambitions.

Hence the third dimension to Cullen’s Budget: targeted spending to boost “innovation”.

There is an 8 per cent increase in spending on research, science and technology this year ($140 million over four years), $110 million over four years to implement the four high-tech task forces’ ideas, a new $19 million spending fund and $12 million capital fund for commercialisation of research and other bits and pieces. There is also more money for trade promotion and more effort to attract skilled migrants — including, for the first time, from the United States. Total spending on new “innovation” initiatives in 2003-04: $76 million.

Note that number. It is not in the health, education, housing and welfare league (though a chunk of education spending is skill-geared). If the government wanted a step change in economic performance as urgently as it wants a better society, it might exchange this gentlemanly trot for a gallop.

That would not involve capitulating to business’s demands for tax cuts and RMA changes and reversal of Labour’s rebalancing of workplace laws.

The point is this: the government believes, right or wrong, that it can get growth up with Jim Anderton’s and Pete Hodgson’s facilitative supply-side programmes and eschews the alternative of tax and regulatory cuts to reduce business costs. If Cullen is to prove that argument, he may need a heavier shoulder to the Anderton/Hodgson wheel than this Budget lends.