A breather before bingeing

Finance Minister Dr Cullen is in an enviable position, despite his protestations of poverty. Every year he receives billions of dollars in bonus tax that he did not expect. Most treasurers around the world would give their right arm to be in his place.

These windfalls have allowed Dr Cullen to increase spending by $20 billion a year since 2000. But there is a strong case to take a breather and assess what we've achieved before we continue this massive binge.

Despite the large increase in spending, most indicators show that New Zealand has not reaped the expected social benefits. Life expectancy, hospital outputs, literacy, violent crime, suicide, poverty and inequality are largely unchanged from 2000.

This is an issue which should be taken seriously by all political parties. Most people don't mind paying tax, as long as we know it makes us better off as a country. Otherwise, there is no point spending more just for the sake of it.

If I were Dr Cullen I would therefore put a temporary moratorium on new spending until we've done a proper review of our recent spend-up. We can learn a lot from Britain and Australia, who have created entire government departments with the sole job of measuring the results of public spending.

Prime candidates for review should be policies which encourage "churning", whereby Government spending is recycled straight back to the people who paid the tax in the first place. This spending is wasteful, inefficient, and does nothing to help the disadvantaged in society.

A good example is Working for Families, which provides benefits for families earning well over $100,000. The irony is that at the same time many of these families will be also paying the top rate of tax.

Even if we allow for a small spending increase each year to cover for inflation, within four years we could have nearly $5 billion available for personal tax cuts. We could then have just two flat rates of income tax at 25 per cent for income above $40,000 and 15 per cent for income below, and remember this is with no cuts to any spending.

For a person on the average wage this would be an extra $44 a week in the pocket, and it would be well deserved. For the past seven years New Zealand has had healthy economic growth but the Government has gobbled up most of the proceeds.

It looks as if Dr Cullen will unveil a package of business tax cuts today, and this is a good start, but everyone deserves a break – not just corporations.

Critics might argue that tax cuts on this scale would be inflationary, and push up interest rates. But if tax cuts replace proposed Government spending they will actually be less inflationary. Of course some people will spend their tax cuts, but at least some will save and invest and pay off debt. Compare this to Government spending, where by definition, 100 per cent of it is spent.

Cuts in personal tax would be good not just for workers, but for the country as a whole.

Lower tax would make it more rewarding to invest, employ people, to enter the workforce and work longer hours. Everyone knows that incentives matter – that's why the Government taxes cigarettes and fines speeding drivers, because they want to discourage those things. Taxing productive activities will have exactly the same effect.

The effect tax has on our international competitiveness should not be underestimated. If nothing else, it serves as a marketing function. Lowering taxes shows that as a nation we celebrate achievement and hard work, rather than penalising it. This is important because average tax rates around the world are falling, especially in Australia.

I realise these ideas probably won't impress Dr Cullen much, so let me make a couple of less controversial suggestions.

Firstly, our tax thresholds should be adjusted to match inflation every year. This would solve the problem of "bracket creep", whereby salaries increase naturally over time to meet the cost of living yet the thresholds stay the same.

This means in real terms our tax rates increase subtly every year, as we pay more income in higher brackets. As a result, a person on the average wage now pays an extra $2400 in tax a year than in 2000, despite being no better off in real terms. This is a double standard given that benefit rates are adjusted every year to match the cost of living.

This leads to my second suggestion – scrap the top tax rate of 39 per cent for income over $60,000. This is a great example of the tall-poppy syndrome in action. It sends a message to talented people that success will be punished, not rewarded, in our country. It's a mindset that we can't afford any more, given the global competition for labour and capital.

Overall, what I'd like in this Budget is a dispassionate look at what really works.

The facts clearly suggest that giving an extra $20 billion a year to politicians to spend has delivered only poor results, so let's give taxpayers a chance instead.

Phil Rennie is a policy analyst with the Centre for Independent Studies.