Parker David: Budget Debate 
Parker David: Budget Debate 
[Volume:663;Page:11222] 
Hon DAVID PARKER (Labour) 
: 
 I will make a couple of general comments about equity before going on to try to undermine the myth the Government is portraying that this Budget achieves a significant rebalancing of the economy. 
First I think it is important to put on record that this Budget should be valued according to how much one values one’s word. There are three broken promises in this Budget. The first promise was made by John Key on behalf of the National Party before the election and that was that National would not increase GST. That promise was broken. The second promise was that National would not borrow for tax cuts. This Budget increases Government debt in order to fund tax cuts. It is not a mere tax switch as the Government pretends. It is increasing Government borrowing to fund tax cuts. That is the second broken promise—the Government promised it would not do that. The third promise which was made before the election was that National would roll out more free early childhood education. In actual fact this Budget cuts provision for quality early childhood education and this imposes a future cost on parents whose children are currently receiving that free early childhood education. So if one values the keeping of one’s word one would not value this Budget because those three promises have been broken. 
Other speakers have spoken about the fact that some of the benefits in terms of income tax cuts are largely dissipated through the effects of inflation and the increase to GST. That is true except of course for the highest income earners. We know that a full one-third of the cuts to income tax accrue to the top 5 percent of income earners. I think that bears repeating because it is easy to say too quickly. It does not bear scrutiny because it seems unfair that a full one-third of the total value of those income tax cuts goes to the top 5 percent of income earners. That is disproportionate and it shows that the overall effect of this Budget is what we always see from National which is that the proportion of taxes that are paid by low and middle income earners goes up and the proportion of total taxation paid by highest income earners goes down. Stripped bare that is what the Budget does. 
I will turn to the issues relating to whether this Budget is fiscally responsible and then I will deal with the issue of whether it rebalances the economy. David Cunliffe noted earlier that the Government borrows more than a billion dollars extra as a consequence of the tax cuts in this Budget. That is correct. In the first year the extra borrowing of the Government will be something like $450 million. I ask whether that is prudent at a time like this. Well I think it is not yet clear that the world is clear of the serious problems following the world financial crisis. New Zealand is better placed than most countries because of the previous Labour Government notwithstanding the protestations of John Key when he was Opposition spokesperson on finance followed up by Bill English who said exactly the same thing. Every time Labour ran a Budget surplus they said that we ought not to be have been running surpluses in those times and that we ought to have been giving tax cuts. 
If we had done that New Zealand would have been closer to the position of those European countries that have such high levels of Government debt which is causing problems not just in countries like Greece but also in Spain Ireland Portugal Great Britain Japan and the USA. In those countries high levels of Government debt are constraining Government action. The risk of this so-called double dip has been highlighted again by economists as being a consequence of the problems that we are presently seeing in Europe which has some serious problems with sovereign debt. Europe has some serious problems that go to the stability of the eurozone generally and many pundits are now predicting that the eurozone will break up because of the strictures that are being imposed on the Latin countries by Germany in particular and because of the imbalances that have been allowed to build up in Europe. There are massive trade surpluses in countries like Germany and there are trade deficits in countries like Greece which means that those countries have current account deficits as well as Government deficits. 
The prospect of the so-called double dip—of a second whammy if you like—besetting the world is real. It will not necessarily happen but the risk is substantial. In the last week I have seen reports that in Beijing there has been a 90 percent decrease in the volume of property transactions which has been holding up demand in Australia and therefore in this part of the world. A 90 percent decrease in the volume of transactions suggests that its property boom is coming or has come to an end. That could have some pretty big implications in this part of the world. 
That is significant because the Government has made some brave assumptions in this Budget as to future tax revenue. Those assumptions are very brave and they may not come to pass. I think Business and Economic Research Ltd has put it well in its Budget commentary. It states: “New Zealand’s largest single vulnerability is now its large and growing net external liabilities. New Zealand now owes the world $168bn or around 90 per cent of GDP.” I say good on it for acknowledging that it was right that the Minister of Finance acknowledged this as being the biggest risk to New Zealand at the moment. 
But the Budget commentary having identified this as “the largest single vulnerability”—and those were the words used by the Minister of Finance in his Budget speech—goes on to state that that vulnerability will get worse over the next few years. Of course that is because we have not only a Budget deficit as a result of the Government spending more than it collects in tax but also we have the country spending more than it earns in the world with the current account deficit going up to 7 percent of GDP by 2014. 
That points to a couple of things. It points to the fact that the so-called rebalancing of the New Zealand economy that the Government talks about is baloney. This Budget does not rebalance the economy. It rebalances taxes so that more tax is being paid by the low to middle income workers and less is being paid by the higher-paid workers. It rebalances only taxes; it does not rebalance the economy. The effect of this in terms of New Zealand’s overall net asset position in the world as predicted by Treasury is that by 2014 New Zealand’s net assets will be negative 100 percent of GDP. That is an enormous figure—negative 100 percent of GDP will be the sum of our net debt in the world. That should be worrying to New Zealanders because it is not sustainable. 
To have a current account deficit going forward in the future of 7 percent means that we are not exporting or saving enough. We are not rebalancing the economy towards savings in this Budget. If we contrast that with Australia we see that the big difference between the New Zealand and Australian economies is that Australia has a better savings record and therefore Australia has more investment capital available to it. It is no surprise that Australia with its better savings record owns our banks—we do not own our own. Every year we export to Australia not just the interest that we pay on our current account deficit but also the profits of those four big banks because those banks are Australian-owned. We do not own our banks because we do not save enough. The economy is not rebalanced to address that. 
In addition to that the Business and Economic Research Ltd analysis asks: if it is not the net external sector that is rebalancing and causing growth in the economy where is it coming from? Where is the Government going to see the growth in the economy driving a growth in revenues to get the Government deficit back to neutral? The commentary notes that the Treasury forecast assumes a rebound in non-residential private investment. It notes that this business investment will grow according to the forecast by 6.2 percent in the current year followed by 10 percent in the following year 4.7 percent in the year after that and then 3 percent in the following years. The commentary notes that that is a hugely optimistic forecast given that at the moment businesses have cash-flow problems. They are having difficulty accessing credit for expansion even if they are not having cash-flow problems. If they need to borrow some money from banks they are having difficulty accessing credit for expansion. 
The summary of the commentary by Business and Economic Research Ltd states: “Yes an investment rebound of this magnitude would be welcome news indeed. We are just unsure as to how confident we are of it occurring. But it is the basis upon which government revenue forecasts and hence the affordability of the tax cuts rests.” I think that is a good summary. So if this investment rebound does not come to pass as it is predicted to where does this leave the Government? Well it leaves the country with rising Government debt so the Government will have only three choices. It will have to cut spending and cut services it will have to increase taxes or it will have to flog off capital assets. The Government already knows that it has put us in that position because it is signalling that it will flog off capital assets—the silver that has been accumulated through years of prudent management by prior Governments—such as Kiwibank and electricity State-owned enterprises. State-owned enterprises will be flogged off in order to pay the operating deficit that the Government is accruing.