Friday, 7 March 2008

the deficit

oops, that tiltle sounds like an accountant's version of a john grisham title! but of course we accountants are much more interesting than lawyers. no really, we are. just think how much time has been spent over the last few years talking about the massive government surplus and that miserly dr cullen, holding on to all of it instead of dishing it out in tax cuts.

well, today the truth is finally emerging. now that we have a (shock, horror) deficit, there is hope that people will finally understand that "operating surplus" had very little to do with actual cash available to spend. so the "operating deficit" also means that there is still cash to put towards tax cuts or increased government spending. the loss is mostly on paper, as a result of the drop in international share prices.

which brings to light the dishonesty of the national party, its supporters and many media commentators who have been pushing the line in my opening paragraph. they have all been happy to say "dr cullen is sitting on a surplus of $11 billion dollars", and pushing hard for tax cuts, when they knew full well that there wasn't $11 billion dollars to be spent.

further, from the cash surplus, money was needed for other things: investment in infrastructure (such as roads) which had been massively run down over a decade, new buildings for hospitals and schools, and saving so that we can afford superannuation as the population ages. i truly believe history will show that dr cullen has been a magnificent manager of the economy, with the courage to hold out and do the right thing in the face of enormous pressure from the media and opposition parties.

tax cuts in previous years would have been inflationary, so he held off. now that the economic downturn has arrived, he is well prepared to deal with it. he is the ant compared to the national party grasshopper. i loved this quote:

While this [ie the deficit] is a downside, the upside for Dr Cullen - who has been well in the black for many a year - is he can now have a go at National over tax. Dr Cullen mused that when the Government's coffers were full National would call for a tax cut – given that there is now a deficit he wondered whether that meant there should be calls from the Opposition for tax increases.

but no, hon bill english is saying there is still enough money for tax cuts. not much of a surprise there. one would hope he might also admit he was wrong to be calling for large tax cuts in an inflationary environment back in 2005, but i'm not holding my breath. (well actually, it was john key who is was the finance spokesperson for national then.)

personally, i'd prefer not to have tax cuts but would rather the money was invested into things like tertiary education (increasing the numbers getting student allowances, keeping fees down while increasing wages), or into research, and certainly into more measures to reduce child poverty. unfortunately, i don't think the political climate would sustain this, and tax cuts may be useful at this point in time to reduce the impact of the economic downturn.

no change in the official cash rate though from the reserve bank. i have to say that i've got some sympathy with dr bollard. for years he's been warning us that we've been borrowing too much, but no-one has been listening. now that high interests rates are starting to bite, he's basically saying "you made your bed, now go lie in it". which is not nice, but really, if he doesn't do it, how are we going to learn to live within our means. it's just not sustainable to keep spending more than we earn on a national level.

tax cuts won't help solve that problem. the government can only do so much. it's up to the rest of us to fight that consumer culture pushing us to spend, spend, spend.

tomorrow is international women's day, and i've got a breakfast meeting. i really hate breakfast meetings, especially ones that start at 6.45am. will report back on it tomorrow.

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