According to Dr Cullen we can have tax cuts – because he saved up our money for a rainy day.
Now I agree with the idea of running a surplus during the upswing of a “business cycle” and deficits on the way down, however I feel that Dr Cullen is again abusing terminology to make himself sound like a good fiscal manager.
I have said it before and I will say it again, Dr Cullen has been fiscally irresponsible (this post also goes into more detail around tax policy and cycles). He has gone past the automatic fiscal stabilisers that exist in government and allowed average tax rates to rise over the last few years. He has abused the Keynesian name by implicitly indulging in “fiscal tinkering” – a policy no economist would support. This is because not adjusting for “fiscal drag” is effectively the same as increasing taxes.
Back to the issue at hand, the answer to the title of this post is yes.
Tax cuts are a structural issue, the tax rate should be independent of the economic situation – and even with the downward revisions to what New Zealand’s “potential” output level is, the current tax rates are not long run neutral.
However, the tax rate should be set such that the government runs a balanced budget (and so, over the economic cycle it has to provide enough revenue to pay for government spending). Allowing taxes to increase (fiscal drag) and then cutting them rapidly distorts economic decision making, and has left us in a worse situation to deal with the financial crisis than if we had been adjusting for fiscal drag every year (by increasing uncertainty, and distorting the allocation of resources between periods of time).
Now Dr Cullen is forecasting a situation where he overspends in the medium term – going from one type of irresponsibility to the other type does not make him a sound fiscal manager.
When National comes out, they will need to be explicit that higher tax cuts come with the requirement of lower spending – if they are unwilling to admit this then they are just as bad.