Cullen's legacy of no tax cuts
One of the great parliamentarians retired this week, with Michael Cullen delivering his valedictory speech. All sides acknowledge he was a great parliamentarian, but was he a great Minister of Finance?
Before we answer the question, let us acknowledge his skills as a Member of Parliament. Few MPs dominate the House. Muldoon and Lange did. Rowling didn’t. Even Bolger and Shipley didn’t, and neither did Palmer or Moore.
Since the demise of the two giants – Muldoon and Lange, the three MPs who were the Masters of the House were Michael Cullen, Richard Prebble and even I have to admit it – Winston Peters. Most MPs would not trifle with the Speaker – well Speakers would not trifle with these MPs.
So Cullen departs, leaving just Phil Goff as the sole survivor of the class of 1981, and only some trainee giants in the House – Darren Hughes, Gerry Brownlee, Rodney Hide and possibly John Key.
Turning to his legacy as Minister of Finance, it is more mixed. Up until a year ago, some talked him up as entering the record books as one of the greatest ever Ministers of Finance – a huge extension to the welfare state, continuous economic growth, reduction in debt, and even maybe some tax cuts. Also some real legacy items such as the Cullen Fund and KiwiSaver that would be with us, longer after Dr Cullen himself.
Even though the author disagrees with many of Labour’s economic policies as inefficient, untargeted, and providing the wrong incentives (such as interest free student loans), I acknowledge for Labour supporters who do like such policies, Dr Cullen delivered a record number of them. So I don’t judge him down for pursuing policies of Labour, not National. He was a Labour Minister of Finance – make no mistake.
But his attitude to tax cuts is what stops him from ever entering the rolls of the great Finance Ministers in the views of most of the public. His opposition to personal tax cuts was so strong, that it played a major part in Labour’s third term unpopularity and losing the election. His 2008 tax cuts were seen as insincere, a booby trap for National and likely to be cancelled after the election (which inevitably would have happened if Labour had won).
Providing tax cuts when you have non stop economic growth, should not be constrained to National Governments only. I certainly expect Labour and National to differ on the size and shape of tax cuts, but not on whether you have them or not. And the public has the same view.
Dr Cullen enjoyed eight years of economic growth and some modest inflation (pushes wages earners into higher tax brackets). This massively boosted the tax take from around $30 billion in 1999 to close to $60 billion in 2008. When you have such huge increases in tax, there are basically three things you can do with it:
1. Increase spending
2. Reduce tax rates (or increase thresholds)
3. Pay off debt
Most people are open to a rational debate about how the Crown should allocate its increased income between the three options. Economic dries like the author might advocate 50% on tax reductions, 30% on increased spending and 20% on debt reduction. A left winger might advocate 50% on increased spending, 30% on debt reduction and 20% on tax reductions. These are both reasonable options.
But Dr Cullen’s great failing is that for eight years he split between spending and debt only. He effectively gave 0% to tax reductions. This was the ideological equivalent of a National Minister of Finance who gave 0% to increased spending. Could you imagine a Government that did not increase spending once in eight years? As preposterous as one that never reduced personal tax rates once in eight years.
So his total opposition to tax cuts was the first reason why Dr Cullen goes down as a good, but not great Finance Minister with the public.
The Second was canvassed last week – his “booby trapped” 2008 Budget that threw away caution and set the scene for the fiscal disaster inherited by the National Government. Dr Cullen can not be blamed for the credit crisis, but he can be blamed for not leaving a surplus.
The third chink in Dr Cullen’s armour is the fact that his long record of economic growth was spoilt in his final year in office. NZ went into recession a year before most countries, in advance of the credit crisis. Now personally I don’t think you can generally blame a Minister of Finance for when a country goes into recession. Droughts tend to have more to do with it. But as Finance Ministers get to enjoy the credit for the good years, they do get their sheen tarnished by the bad years.
Who knows what would have happened if Dr Cullen had delivered small sustainable tax cuts as the surpluses got huge? It may have won Labour a fourth term, and Dr Cullen could have entered the political record books as one of New Zealand’s most successful prosperity Finance Ministers. Alas for Dr Cullen, and for taxpayers, we will never know.