The fate of tax cuts promised by National will be a political decision. Even if economic considerations alone determined the outcome, however, there should be no stopping those scheduled from 1 April. They will be stimulatory, helping to lift people’s purchasing power; ditching them would adversely undermine confidence which needs uplifting. But tax cuts timetabled further out (along with everything else affecting the Govt’s fiscal position) will require close scrutiny of the likely consequences.

Striking A Balance. The issue was raised in Parliament when Bill English (speaking for the PM) stood by John Key’s response when asked last week if the next two rounds of tax cuts (legislated for last year) will go ahead. We live in dynamic times, Key said, “but I wouldn’t jump to conclusions on that. It is my expectation they will go ahead.” Labour’s Phil Goff favours better targeting of the cuts to preserve and create jobs, championed at the Job Summit by the Warehouse’s Stephen Tindall and Air NZ’s Rob Fyfe (who said there are more effective ways to stimulate the economy than broad-brushed tax cuts). Goff further cites Brian Gaynor, Gareth Morgan and RBNZ Deputy Governor Grant Spencer as economists who reckon tax cuts for those on higher incomes tend to get saved rather than spent; hence they are not cost-effective in preserving and creating jobs in a recession. The Govt is sticking to its guns - its aim is to strike a balance between the short-term need to cushion people from the sharper edges of recession, and the long-term need to lift NZ’s growth prospects (and it won’t try to tell people how to use their extra discretionary spending).

Pledges Don’t Count. The NZ Herald distinguishes between a domestic recession (a correction of house prices and private debt) and a contraction of export markets (hurt by a global downturn). It’s the domestic recession which has exposed a fiscal dilemma: a Govt committed to early tax cuts faces Labour’s public spending levels but its own promised tax level. Something has to give, a postponement of the tax cuts due in April or cuts to public spending. Both are problematic politically. If commitments to tax cuts were a matter for economic considerations alone, a hard look would be taken at the Govt’s fiscal position and the size of the deficit assessed before tax cuts beyond April are implemented. Effective policy responses in dynamic times should not be hamstrung by months-old pledges.

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