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Technically Speaking: Cullen's words boomerang back, threatening to hit him in the seat

Friday 15th September 2000

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Halcyon days they were, the early months of the Labour-Alliance coalition. The New Zealand Herald even featured a fulsome hagiography of the new government's first 100 "days of hope." That call was dead wrong.

There were great expectations for Treasurer, Minister of Finance and Minister of Revenue Michael Cullen. It is questionable from a checks-and-balances point of view whether it is desirable for one person to hold these three powerful portfolios. Dr Cullen has since fallen on his face with the business community. It is timely then to revisit an interview he gave the Australian investment industry magazine INSTO back in the autumn.

His hubris is palpable. We review key investment-related topics he touched on in turn, some of which are haunting him already. To use Australian terminology, the boomerang has come back.

* The current account deficit: Dr Cullen was fatalistic, saying "The question is which part of the beanbag you kick. The answer is you have to kick it everywhere and even then it won't move much." He suggested increased savings, exports and government intervention as leisurely ways of putting the boot into the bag. The country's credit rating was a matter of the current account deficit and not government spending plans, he asserted. He has since spent much of his time explaining away the crashing dollar (illustrated).

He picked 4% nominal and 2.5% real as long-term sustainable GDP growth rates and said he wanted the current account deficit under these levels. The deficit has grown worse in the meantime as flight from the kiwi dollar shows.

Asked if New Zealand would follow Australia and abolish interest withholding tax on government bonds held by foreign investors, a move that could support the dollar as it may have Australia's, Dr Cullen said, "It's not on the agenda at the moment. We haven't really had a big problem with portfolio investment in New Zealand. We are more concerned about the mix of foreign investment."

His comments were related to his claim there was too much foreign investment in existing New Zealand assets and consequently excessive repatriation of returns overseas to the detriment of the deficit. Instead he wanted "foreign investment building new capacity and therefore in effect paying for itself in terms of current account issues." Taking his hint, foreign investors have been obligingly pulling out of New Zealand bonds, shares and other assets.

* Encouraging savings: This is a major platform for Cullenisation of the economy. Here Dr Cullen took credit for his 39% tax hike on $60,000-plus earnings by saying it gave "limited tax incentive" for high earners to place funds in lock-in superannuation schemes taxed at 33%. Subsequently he has been exercising his wits over preventing these earners from unlocking these savings from super funds and causing more uncertainty in the savings industry. As saving is so important to remedying the current account deficit, according to Dr Cullen, it is disheartening he said he had made no decisions on encouraging voluntary superannuation because "it's still early stages." One leading criterion of the treasurer's success or failure would be changes in the savings rate up until the next election.

* State-assisted retirement saving: Dr Cullen told INSTO he wanted to pre-fund pensions out of government account surpluses invested in "a commercial fund at arm's length from the government." He denied this would be compulsory saving, saying 92% of referendum voters who tossed out the Winston Peters compulsory scheme meant compulsion was "clearly off the agenda." Yet taxation is compulsion, as would be government diversion of revenue into its pension fund.

Individuals would have no identifiable personal claim on the Cullen pension fund. In his words: "I would ... argue against a state-mandated scheme which is individualised because that confuses what the role of the state is, which is to ensure an adequate level of income in retirement. The state's issue is the floor and the issue on top of that is why do we have such a poor savings record. Is it related to aspects of our taxation regime which don't seem very favourable to long-term savings? We have a unique taxation regime for savings that has clearly not been working."

These words are from the man who hiked tax on the voluntary savings class to 39% and who is thinking about imposing the punitive foreign investment funds regime on kiwi investors in UK-registered trusts.

* On social services, SOEs and the people's bank: State asset sales were ruled out by Dr Cullen: "In fact, we have a non-privatisation programme." Tough luck for the major-listing-starved NZSE. He said Housing New Zealand (HNZ), not an SOE, would be government-subsidised in offering lower rents and hinted there could be a resultant drop in the value of the state's housing stock, with possible implications for HNZ's bonds. TVNZ, an SOE, may be converted into a non-privatised, non-SOE: "It is not that we are going to turn SOEs into non-commercial enterprises. The real issue is if TVNZ becomes a quasi non-commercial enterprise, perhaps it shouldn't be an SOE." Implications surely follow for government dividends from SOEs and related need for alternative tax revenues. On the People's Bank: "That will end up being New Zealand Post expanding in partnership with a private sector bank.... NZ Post can finance any investment required off its own balance sheet." The People's Bank looks like a bottomless pit for taxpayer subsidy with NZ Post sacrificed as a competitive business along the way.

* The Budget: The treasurer claimed most credit for his innovation of not breaking down the March Budget policy figures. In his own words: "Unlike previous governments, we didn't outline what the detailed expenditure items in the Budget will be. Instead, we outlined projected expenditure overall, revenue, operating balances, net debt and so on. Within that we expressed our aim to achieve a level of prefunding for New Zealand superannuation. What we are foreshadowing is that the operating balance will really consist of two parts. Part will be looking at the current framework of government spending and part will be put into developing an asset base to assist in funding superannuation."

So there is the rub. Dr Cullen stands or falls on his retirement prefunding scheme, which will compete directly with current state expenditure. He would save the nation by saving for it but to his redistributive colleagues eager for electoral credit a dollar saved is not a dollar spent.

National debt at above 100% of GDP will not be paid off; instead savings and investment will not be boosted by tax cuts and he will have to battle against other claimants to spending. The credibility of his pension plan will make or break the government at every level. It is the shadow over every achieved difference such as "closing the gaps" that the government will want to show voters at the next general election.

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