Economic Ignorance from the Right (shock!)

The latest flash of economic ignorance from the right has come in response to the current account deficit figures released yesterday. David Farrar's comment:

NZ has just posted its second highest current account deficit - $11.9b or 8% of GDP.

And somehow this is not Dr Cullen's fault, but a reason not to reduce tax, even though this has happened under Labour's high tax policies.

Now let's debunk Dr Cullen's logic. If one actually gives NZers some of their own money back to them, this will allow people to save more!

Do the maths in your head. If you propose to cut the size of the surplus by $2bn through tax cuts, you reduce public saving (the budget surplus) by $2bn (this is a static analysis, not a dynamic one - ignore arguments about whether a tax cut would induce growth or not. Ignore it because it's not relevant to this question, which is how to deal with a short term spike in the current acct deficit).

You give it to citizens to do with what they will.

A reasonable assumption - the only reasonable assumption - is that they will spend some, and save some.

That is, saving will be less than when the money was part of the budget surplus - in the surplus, it's 100% saving. Tax cuts equal lower saving.

What solves a huge current account deficit in the long run? Higher savings.

What would tax cuts achieve? Lower savings.

Does NZ have a huge current account deficit? Yes.

Does that mean cutting taxes would be foolish and irresponsible?

Yes.

The outcome would be a) lower savings across the economy, and in addition b) more pressure on the current account deficit, as higher consumption sucks in more imports.

Thank God these people aren't going to be on the Treasury benches.

Comments

[David Farrar]

Cullen is going to spend the entire surplus anyway. There is no way he will allow it to ever get so big again.

Plus I look forward to you condemning Labour when they announce tax cuts in next year's budget.

[Mr K]

David,

If you don't mind me saying so, you have just dodged the issue. Do you want to try again at addressing the point Jordan has made?

Mr K

PS You can spend the surplus in ways which do not contribute to the trade deficit, unlike tax cuts.

[Aj]

Since kiwi's are incapable of saving, or slowing our spending, the surplus has been a defacto savings on taxpayer's behalf.

[spam]

I would think that Welfare for families (which is what Cullen is going to spend much of the surplus on) would be even less likely to result in savings than tax cuts would.

[Paul]

Studies

(Berle & Infometrics, Treasuryy etc) have all shown that when one recieves a small windfall say a pay rise (as would be the effect of a tax cut) we spend it.

Not only that we spend it on consumer products made elsewhere.

The money goes offshore, with only a small percentage staying here and even smaller percentage going into savings.

Christ it's not hard, but when you can't see past the textbooks and theory pages, then you're not going to see the big picture.

If we had a culture of saving, then this would be a different senario, but it aint.

[Jordan]

"Cullen is going to spend the entire surplus anyhow" - uhhuh. Of course he is. Right.

[t selwyn]

I have an analysis of the issues esp. currency value at TUMEKE.

JC: I agree that if Cullen sticks the surplus off-shore in the Super fund then it will not be inflationary. But the construction projects and throwing money at costly projects just because there is a surplus will.

I think people will "invest" in property or buy plasma screens with their tax cut money rather than put iot aside. But the increase in consumption will create more GST revenue.

Your assumptions are based on all-things-being-equal/ststus quo. If there was a package to accompany the tax cuts to make us "behave" properly (ie. save/invest) by having incentives to do so eg. super funds etc. then the situation changes.

[Craig Ranapia]

Perhaps Dr. Bollard's opinion on what constitutes inflationary Government spending is the only one that really matters?

And I'll respectfully disagree with DPF - the only way I can see any form of tax cut in next year's Budget is if Michael Cullen is goneburger from finance. There's brazen (Labour having a Damascene experience and realising that tax cuts are the 13th plague), and there's just going too far (Cullen fronting it without blushing)...

[Gooner]

Great logic. Cullen should then increase income taxes to 75% to stop consumption. That's the extension of your hypothesis.

[Logix]

I have a real question...the govt is currently spending about 5% of it's tax income on debt servicing, about the same as the total of the unemployment and DPB benefits.

If the govt eliminated all of it's debt would that justify an actual reduction in tax rates? Is this a goal worth sending to Kiwis...we will cut taxes when the govt has zero debt and legislates to keep it that way?

I know there are arguments in favour of productive debt, but it is my feeling that the risks involved are higher than we assume. What is worse is that there is nothing stopping a rogue govt. racking an enormous debt, and then handing the burden thereof to their successors who had no part in it's approval.

[Jordan]

No, because we need consumption obviously. The point is when consumption is too high, or savings are too low, do you increase consumption/decrease savings by cutting taxes?

The answer is no, you don't. Labour's policies are marginally expansionary; National's would have been $7bn higher.

[Bernard Woolley]

Woohoo! Windfall day! I don't need to save any more because the government is going to do it all for me from now on! I think I might go and spend what I was going to be saving on overseas high-tech consumer goods. Yay!

Seriously, Jordon, your solution has as many problems as allowing people to save individually on the right. I agree that people can't be trusted to save, I believe the solution is named govt-approved savings accounts, becuase I sure don't trust the Government to save for me without ringfencing that money for me. There must be some individual accountability with savings. Then if you do have tax cuts, they can be applied to you savings account until it is full, at that point you can then get some cold hard cash. Until that point in time, everyone is forced to save - because hey, we haven't set a great example of being able to do it ourselves. At the same time the Government doesn't have a stellar record of spending money in areas it was collected for...

[Sam Vilain]

Gooner - ACT's Rodney Hide said that to Kim Hill in an interview during the campaign.

Transcript from memory:

RH: If it was better to spend with the government, why wouldn't you increase taxes to 80%?

KH: Oh, Rodney, that's a *ridiculous* argument. Surely there's a balance somewhere between the right amount to tax and the wrong amount!

[Bernard Woolley]

Tax refunds should then be applied to the personalised account rather than returned in cash too.

[tim barclay]

The Labour Party is alone in its socialisation of people's incomes saying the Government knows best. The blunt truth is a sizable proportion of NZers are quite sceptical of the Government spending money wisely. The rest are oafs who are sucking the taxpayers' tit and the Labour Party shamelessly favour's them.

[Aj]

I am not an oaf, and am not sucking the government's tit.

[James]

Who cares? The point is that its my money and how I spend it ( or don't ) is my business...no one elses!It ain't yours,you didn't earn it so F**k off out of it! You greedy ,arrogant,selfish Lefty twats need dealing to big time!

[lou]

All I have to say is: BULSHIT Jordan - go back to school.

[lou]

Ah Hum - BULLSHIT

[Psycho Milt]

The man who seems unable to understand he's part of a society wants to call other people selfish - rich!

[Logix]

James wrote:
"Who cares? The point is that its my money and how I spend it ( or don't ) is my business...no one elses!It ain't yours,you didn't earn it so F**k off out of it! You greedy ,arrogant,selfish Lefty twats need dealing to big time!"

Yet another from the "tax is theft" school of thought. Normally I would heap scorn on this silliness, but I once again humbly point out to you that under this Labour govt that you so despise, tax revenue as a percentage of GDP (which is the only meaningful measure I can think of) has actually reduced.

[M'lud]

I wonder if Jordan will trot out his "savings" argument after the next budget, when Cullen will undoubtedly make most of the surplus disappear into welfare spending.

[sagenz]

Jordan - you are wrong, simply for wanting to ignore the multiplier effect. Some money will be invested, much spent. The CAD arises from foriegn banks lending to the residential sector and foriegn owned corporates unable to repatriate real profits rather than nominal gains earned only through inflation. The only solution is long term investment raising the wealth of the nation. This will only be achieved by allowing the private sector to keep more of its own money. Your and Cullens economics are extremely short term and flawed since you both appear to believe the nonsense that because some of a tax cut would be spent (increasing GDP btw) it is better off in nanny states hands.

[sagenz]

Cullens debt performance has only been achieved by a favourable FX gain as a result of the appreciation of NZD. $6.3bn. The CAD IS NOT a short term spike. it is very much part of a long term trend. It would be preferable to let the market price the NZD lower to deter imports and boost exports. This would occur if tax revenue was not being spent to support the NZD by hoovering up excess cash using treasury stock issues. tax revenue buys excess nzd increasing price. Cullen has made the coming crisis worse by stopping flow of earned income to the private sector.

[Bernard Woolley]

Logix - I'll keep note of the whole 'tax as a proportion of GDP' thing and trot it out again as soon as the economy starts tanking as it is predicted to in the next year or so...

[Aj]

As the economy tanks, so will the tax take. % will not change all other things being =

[SPC]

The first important figure is budget deficit or surplus, then its the % government spending is of the economy. At the moment, tax revenue is high per GDP because we are paying back debt, investing in the Super Fund and financing much of the infrastructure spending out of the surplus.

Regarding the BOP, we have a low historic saving, thus high foreign ownership and large outflow of business profits from the country. This is a high currently as well, with high consumer/householder indebtedness.

While families need some tax relief, the more important need is to increase household savings. This means moving the public onto government fiscal propriety standards. Thus tax cuts would only work, if the money was directly deposited into dedicated savings accounts (available for first home purchase or retirement savings).

This is what Kiwi Saver does with the $1000 deposit for those who set aside wage income into the account.

Labour has already worked this one out, as with tertiary loans interest free for the study years, then expanded - this scheme will also grow into the public version of the governments own Fund savings programme.

Government only gets better, while Labour remains in office.

[SPC]

Regarding the BOP, we have a "low" historic saving, thus high foreign ownership and large outflow of business profits from the country. This is a ("high") LOW currently as well, with high consumer/householder indebtedness.

[sagenz]

SPC-Jordan - What you fail to understand is the extent to which tax cuts for the "rich" will be invested in small business. The government can borrow cheaply offshore. it chooses to "borrow" from higher taxpayers through tax surplus. This reduces money available for private investment. you may see it as unfair that the "rich" get tax cuts. But their investment has a higher payback than treasury bonds. Allowing the private sector to keep earned income allows it to invest. Cullens warped tax increases have meant anybody earning above average wage has not kept any additional "real" earned income from the last 6 years. That is reducing private savings and investment. in the long term we will be equally poor as everyone becomes reliant on welfare and loses the income to invest. You will no doubt be happier when everybody is equally poor rather than competitive inequalities.

[Logix]

Also missing from all the right wing angst over taxation is the fact that Labour in the last Budget has for the first time, indexed tax thresholds to inflation.

In the short-term there is little effect, but in the longer term this measure alone will address the CAUSE of the fiscal drag which you are all so stressing about.

[tim barclay]

I guess he needs to put an extra $1.7b into the Cullen fund which the amount that he has to write off Crown assets after implementation of the student loan pledge.

[Sean]

Well, I'm not too bothered being called an economic ignoramus by a leftist. At least we didn't fall for the 'labour theory of value' nonsense peddled by Marx!

[ZenTiger]

Logix, you said: "Also missing from all the right wing angst over taxation is the fact that Labour in the last Budget has for the first time, indexed tax thresholds to inflation."

Is it correct that this indexation is on tax thresholds that were set 9 years prior to the time this will actually kick in?

Would that then be locking the moving thresholds back by 9 years?

Are the thresholds then only adjusted every three years?

And didn't Labour basically promise that only 5% of the taxpayers were to pay the top marginal rate, and they haven't even stuck to that (given that I've seen figures ranging between 11 and 22% based on who you define as a tax payer)

Just why should we be so excited about this?

[Logix]

Zen,

Exactly as I stated, the measure will have little effect in the short term (which in this context is the next 5-10 years), but beyond that it still addresses the CAUSE of the fiscal drag, as distinct from hacking around with the SYMPTOM by cutting taxes.

This alone is a notewothy advance, but not one right wing blogger has been able to bring themselves to acknowledge this fact. And you wonder why what passes for political discourse on these blogs is so petty-minded and acerbic.

Let me put it this way Zen; can you find any reason why in principle the indexation of tax thresholds to inflation is a bad idea?

[PaulC]

This issue has a lot to do with why I didn't vote for National (and why I'm mystified a lot of National's normal base did) - I'm an exporter (I'm a consultant, I export my labour) - I was up for the entire National tax bribe ~$5k .... but some quick back of the envelope calculations showed me that if the exchange rate changed by just under 3c I'd lose the lot - given that Brash would have to borrow for the tax cuts which would push up interest rates which in turn would make the NZ$ more valuable while on the other hand Cullen seems to be trying hard to do the not very sexy thing of trying to pay down the debt it's pretty easy to see where my bread's buttered, even despite the bribe. OTOH I'm kinda pissed off that Labour felt they had to do the Nats one better.

Also if the interest rate goes up 1% my mortgage goes up $1000/year - it all adds up.

This country lives and dies on the backs of it's exporters - I can't figure out why Brash would screw his core constituency like that, he's supposed to be an economist and understand this sort of stuff - all I can assume is that he assumed he could pull the wool over their eyes (bad pun there) as part of a naked power grab

[size genetics review]

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