Sweet William's Swansong
a brief analysis of the 1999 Budget

July 1999

Budgets are not what they used to be, and it's probably just as well. We live in a democracy, so the days in which a Nordmeyer, a Muldoon or a Richardson announced a set of proposals and then proceed to implement them are over. The "bold" budget has had its day.

Most "bold" budgets were never actually bold. They were budgets that announced a policy that was strongly favoured by a small privileged class of voters, and that had to be rammed through over the objections of the rest. Most "bold" budgets simply went with that particular flow. (On the other hand, Arnold Nordmeyer's genuinely bold "black budget" consigned its author to political purgatory.)

Like a moderately assertive mother, Bill Birch (or was it Bill English?) said "no" with a hint of "maybe" in response to pressure for a cut to the top tax rate. The insensitive self-interested response of the income-earning elite to the lack of tax cuts was unbecoming. The likes of Fran O'Sullivan and Linda Clarke were just so out of touch with the concerns of the majority of New Zealanders who face an erosion in their social wage.

The tantrums of the spoilt 10% will continue. The greedies are nothing if not persistent.

What was in the budget that is worthy of comment? A bizarre tax credit payable on childbirth to the partners of employed men. A further concession to an out of control ACC bureaucracy. And the start of a half-sensible public broadcasting policy.

What was missing from the budget? A proposal to deal with student debt. A proposal to fund a social policy program through full employment. A solution to New Zealand's severe balance of payments problem.


Family Plus

The new "Family Plus" package includes the existing Independent Family Tax Credit (IFTC) and Guaranteed Minimum Family Income (GMFI) programmes. To those, it adds the new "baby bonus" (PTC: parental tax credit ); a benefit of $1,200 payable to women in traditional nuclear families following childbirth.

The PTC come into force in October, which means that most women who conceived their babies in the Christmas / New Year holiday period will miss out. If any new benefit should have been backdated to the beginning of the financial year, this was it.

Like the other components of Family Plus, the PTC is not payable to beneficiary families, and is means-tested on the combined gross parental income for the whole tax year.

The big problem is that most households in which a pregnant women is the main breadwinner will not qualify for the bonus; she will become a beneficiary for that period around childbirth.

Consider an example of a couple expecting their first child. One parent-to be is earning $30,000 fulltime. The other is earning $10,000 part-time.

If the mother-to-be is the fulltime worker, then this independent family loses 75% of their gross income when she takes unpaid parental leave. In the absence of paid-parental leave, she is obliged to become a community wage beneficiary. Her benefit will be abated on account of her partner's part-time income.

As a temporary beneficiary, she will not qualify for the baby bonus. Catch-22 is that female-led "independent" families lose their independence at the time of childbirth. Generally, if her partner is anything other than a low income fulltime breadwinner, a working mother will miss her PTC.

Now let's assume that it is the woman who was earning $10,000 (which could mean over 25 hours per week at the minimum wage), and the man who was earning $30,000. The family will qualify for the baby bonus in full so long as she takes at least 8 months off work and she has her baby in April, May, June or July. The annual earnings threshold for the full PTC is $33,576, which represents Dad's income plus 35% of Mum's normal income.

If such a mother takes just 5 months off work, the family's annual gross income will end up around $35,576. They will have to repay $600 to WINZ; half of their baby bonus. Their total penalty for raising their income by $2,000 will be $2,120: $600 (PTC repayment) plus $420 (extra income tax) plus $500 (lost Accommodation Supplement) plus $600 (lost Family Support). The same penalty would be incurred if the father gets $2,000 overtime.

If the mother has her baby in January, February or March, she will not qualify for any baby bonus. Thus many of the mothers of the millennium babies will have already earned too much to qualify.

If the father is a seasonal worker, the mother will get the PTC baby bonus if she has her baby in-season, but will miss out if she has her baby in the father's off season. We might note that non-permanent tertiary education teachers are seasonal workers. Even permanent university teachers face the prospect of 9-month teaching salaries in future.

The baby bonus favours families based around the traditional housewife, and discriminates against families in which the principal caregiver will be the father. Paid parental leave was meant to be a step to support working mothers through a period of both physical and financial stress. The Parental Tax Credit, on the other hand, is a benefit to the partners of low-waged working fathers.


The Broadcasting Fee

The broadcasting fee was a "flat amount" tax, like Margaret Thatcher's poll tax. Hence it was a highly regressive tax, representing a much higher percentage of the income of beneficiaries and underpaid workers than of the income of the average listener of the Concert Programme. It was also expensive to collect. Funding New Zealand on Air from direct taxation is much fairer.

While there must be some concern that the new system will erode the long term commitment to fund NZ on Air, the truth is that, in real terms, the funding was declining and was inadequate. The Broadcasting Fee set an upper limit to the funding of public broadcasting. With that upper limit removed, the opportunity exists to convert TV1 into a non-commercial public service television channel, while also maintaining NZ on Air to fund quality independent programmes.


The Macroeconomy: Unemployment and the Balance of Payments

It seems that the Government has come to take 7% official unemployment (equivalent to 10% jobless) for granted. The budget pays lip service to the problem, "estimating at least 100,000 new jobs will be created over the next three years, on top of the 284,000 more we have already gained since the end of 1991". The government simply assumes that employment growth will accelerate through increased competitiveness generated by globalisation. This means having faith that transnational firms will relocate here, creating unemployment in other countries.

Any idea of using expansionary fiscal policy to move an economy into full employment is a million miles from this budget.

The balance of payments problem was acknowledged, but not addressed.

There is an orthodox Keynesian fiscal policy solution to the problem of unemployment with a balance of payments constraint. It is to increase government spending, while at the same time creating disincentives for New Zealanders to purchase imports. New Zealand desperately needs to employ its people to produce more for ourselves and to export more. We need to run a trade surplus sufficient to offset our huge deficit on overseas investment income. The obvious way to limit both imports and unwanted capital inflows is through a foreign exchange tax (a "Tobin" tax). Otherwise a return to protective tariffs can achieve full employment while reducing our foreign liabilities.

Employment is both an economic cost and a social benefit. Increased employment is the economic price that we can pay to fund both a bigger social wage and to service our overseas liabilities. Given that much unemployment is in provincial New Zealand, this kind of fiscal policy, to be effective, should be accompanied by social investment in the form of regional development. Regional development subsidies are efficient in that they reduce the demand for welfare payments and help to distribute the population in accordance with existing social and physical infrastructure.

Using increased employment as a means to fund the solutions to other problems may seem bold. Really, it's just common sense.



Once upon a time we could fund our social investment and social wage, in part, from the monopoly profits accruing to our publicly-owned means of production. Now that most of our assets have been sold, we rely almost entirely on taxation to fund our social wage. Thus our tax rates should be rising to make up for the lost profits. If Telecom and others are adding value to the New Zealand economy, as they claim, we should be recouping that value through higher taxation. After all, it is the tangible and intangible assets that New Zealanders collectively created that continue to add value to our economy. We, the people, should not be backward in claiming our rightful share of that value.

Taxation, while a cost to some, represents an income for all. Higher taxation is only bad news when public revenue is appropriated by an illegitimate government and not distributed as a democratically accountable social wage.

One irony of our current attitudes to tax is that our low tax rates for high income recipients are accompanied by a totalitarian culture within our tax collection agency. If we accompany higher taxes with a higher and more visible social wage, we will be able to return to a more benign compliance culture within Inland Revenue.


Motor Registration and the Accident Compensation Commission

The ACC is a black hole. And it is an organisation that pays benefits that don't belong in our equalitarian welfare culture. In New Zealand, unlike a number of European countries, we don't pay higher unemployment benefits to those who had been on higher incomes. ACC is the exception. Most of the earnings-related benefits are paid to relatively wealthy men.

I would like to see the demise of the expensive ACC. Instead, we could convert the Invalid's Benefit into a much more flexible kind of support system for all New Zealanders with special needs. The no-fault principle - which does belong to our culture - fits the Invalids Benefit pretty well.

By all means raise the cost of motor registration. But let the proceeds go into something worthwhile, like public transport for the cities, and regional development.


The Student Loan Scheme

Student loans are an unresolved problem that should have been addressed in the budget. Student loans are not real loans. Rather, they are a mixture of off-budget subsidies and student benefits. In particular, student loans represent subsidies to the many new private tertiary training providers that help to keep our young people off the unemployment register and that threaten our publicly-owned universities and polytechs.

These subsidies and benefits, whose prime purpose may be to make the government's accounts appear to be in surplus, are at least as great influences on market interest rates as any other form of public borrowing.

Most former students now pay higher effective rates of income tax than other New Zealanders. Nevertheless, the resulting top rate of income tax (44.2%), which includes ACC levies and student "loan repayments", remains less than the top rate in many other developed countries.

The problem is that young adults on modest incomes find themselves paying 32.2% marginal tax rates; very high taxation for young people whose real pre-tax incomes are lower than their fathers' incomes were a generation ago. The student loan scheme represents a burden borne unfairly by those young adults who might otherwise be saving some of their incomes or having children.


In summary, the 1999 budget is a problem because of its pretence. It pretends that the very real macroeconomic problems that were addressed by budgets in past decades are no longer worth addressing. It pretends that student-loan-funded tertiary education is not a part of the publicly funded social wage. And it pretends that Parental Tax Credits are some kind of boon to pregnant women in the fulltime workforce.

© 1999 New Zealand Political Review

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