Strutting its social democratic stuff

Colin James PREVIEWING the Budget for the NZ Herald for 27 May

Today’s Budget will be just prudent and no more. It is time for Labour to strut its social democratic stuff.

Hitherto Finance Minister Michael Cullen has been wary of too much spending because he has wanted to be confident the operating surpluses the Treasury has been projecting will materialise.

After four years of what economists call “upside surprises” — that is, more revenue than the Treasury has forecast — he thinks he can chance his arm.

So the word is that today Cullen will project only a tiny cash surplus. And he will commit himself to an ambitious three-year programme of more money for lower-income families. That is a major milestone in the Labour-led journey back towards the social democratic world we left behind in 1984. It is the culmination of years of policy development by Social Services Minister Steve Maharey.

Redistribution of resources is a core Labour belief. Social democratic parties — of which Labour is one — aim to reduce the inequalities in society. That is what they are in politics to do.

They aim to reduce inequalities in three main ways.

They represent — or claim to represent — those who have less wealth and less access to the levers of power or are in some way disadvantaged or discriminated against, either through personal disability or as members of a “group” — women, Maori, gays. This month, for example, the government unveiled plans for “pay equity” in the public service. Next month it will table its Civil Union Bill.

Second, they regulate — most notably since 1999 the workplace. Hence the plethora of new laws on health, wage bargaining, the minimum wage and holidays, plus greater power for unions.

Third, Labour uses the Budget to tax and spend — on education services and health care for everybody and on housing and other assistance to the poor and less-well-off.

The mechanism is the “collective” and the most powerful collective is the state. Labour people believe the government can do good and should.

The generation to which Helen Clark and Cullen and most of the cabinet belong grew to adulthood at a time when the good the state was believed able to do seemed limitless. They also believe the private sector cannot deliver social services equitably and “choice” is another word for inequality.

The guiding principle is universality: everyone benefits. They argue that if everyone benefits, everyone who can pay will be less unwilling to pay and that will bind our society together. –

Hence Budget “prudence” in Labour hands does not mean reducing taxes and spending. It means the opposite. Sir Walter Nash, Labour’s first Finance Minister from 1935-49, always balanced his Budgets — but by raising taxes, not curbing spending. The 1972-75 Kirk government went into deficit rather than cut spending.

The Clark-Cullen generation has learned to steer clear of deficits because the modern world economy demands macroeconomic stability — balanced Budgets, low inflation — and deficits destabilise a small, open economy. Nevertheless the Clark-Cullen generation has brought large social ambitions from the 1970s.

To try to square this circle Cullen has taken a leaf out of Nash’s book and raised taxes: imposing a higher top personal rate, letting fiscal drag rake in higher proportions of personal income, pushing up excise taxes on petrol, alcohol and tobacco, pushing up a widening range of government charges and, to come in 2007, levying a carbon tax.

But there is a limit because the modern world punishes high taxes, too.

So Cullen has focused part of his Budgets on trying to prod the economy’s growth rate. So far he has been lucky: the 1980s and 1990s reforms, plus good markets overseas and debt-happy consumers at home have given him four bumper years — and four bumper tax harvests.

But the booming economy has also run him smack into infrastructure problems: too few and poor roads; a serious looming energy shortage; water shortages just around the corner; and — the daddy of them all — serious skills deficiencies among a wide swathe of the population.

That needs more tax, at least as the Clark-Cullen generation sees it. Opponents say the private sector or asset sales could help but Labour rules out the second and is wary of the first.

There is another deficiency: people. The labour market is very tight. Too many people can’t or won’t work. One reason is that it costs money to go to work and it is better to stay on a benefit than take low-paid work, especially if there are children to look after.

One solution is to force people to work by cutting the benefit or setting a time limit. Labour thinks that punitive. Instead, Maharey has for some years pushed an “investment” approach. This is at the core of today’s package.

The three-year package will redistribute a large amount of money to lower-income working families. Most of that is not “investment” but providing “income adequacy” and “affordable housing” (plus simplifying the mainly tax-driven family assistance regime). In addition, in August Maharey will announce a three-year programme to collapse most of the special benefits (accommodation and so on, which he has made more generous) into a “universal benefit” supposed to cover nearly all a beneficiary’s needs.

Maharey argues that he is not just redistributing money but also “redistributing opportunity”: evening up life chances, particularly of children who, a pre-Budget briefing on Tuesday said, develop less well at school if raised in poverty.

That is part of his “investment”. Put some money down now and there will be a payback later in better economic performance by those invested in — and, as a result, fewer of them dependent on benefits. Help out for a while with transport and work clothes when a beneficiary goes working — even keep the benefit going for a time — and the person is more likely to stay in work.

This theory has yet to be proved in practice and overseas evidence is mixed. But Maharey has won a measure of acceptance from the Treasury and his colleagues.

It is a step away from the 1970s “palliative care” approach which presumed social disadvantage through no fault of the individual, who then could exert a “right” to social support. The numbers ballooned; spending on their care now represents a large opportunity cost for the country which bothers some ministers; and that has prompted Labour to import reciprocal “responsibility” into its thinking.

So “work” is also central to today’s package: more people skilled enough to work, actually in work, in better-paying jobs. That way Cullen gets to collect more tax for all the other things the Clark-Cullen generation came into politics to do.

And he gets to keep his surpluses intact. This Budget is the test.