May 18, 2008

What Is The Budget Going To Be Like?

Prudent or lolly scramble?

These questions are being asked by the media all over the country. Our own view is that Cullen will be focusing on Labour's core constituency - tax cuts aimed at those hurting most, big increases in health and education, and a further increases in key infrastructure, road, rail and broadband. It will have to be reasonably prudent as anything too inflationary will delay the interest rate cuts that will be so essential to Labour having any chance of being re-elected. If interest rates start dropping, and if the new tax rates start kicking in on 1 October, and if the lower dollar starts an export led recovery, there is a chance that the mood will start changing out there. Of course the economy isn't everything, more scandals etc may have a bigger impact.

Fran O'Sullivan is not too far from our view in today's NZ Herald.

Finance Minister Michael Cullen's ninth (and probably last) budget will not bring home the electoral bacon for Labour.
That is, unless his colleagues and some frightening political poll results have persuaded him to throw in a last-minute major lolly scramble - fear of losing seats might do that.
But digging into taxpayers' pockets to fund another bribe - such as major expansion of Working for Families - would simply risk a backlash from other sections of New Zealand society.

What will the tax cut look like?

Most New Zealanders will at least get a bit extra in their pockets from rolling tax cuts and other payouts, meaning they can buy a few extra rashers at the supermarket.
The problem is that unless they fall into Cullen's favoured lower- to middle-income brackets they may find themselves waiting a long time for the tax cuts, which are expected to be no more than $25 a week.

What impact on Bollard?

Cullen and Prime Minister Helen Clark will be hoping a prudent budget on top of statistics showing a big increase in unemployment and falling consumer spending will persuade Reserve Bank governor Alan Bollard to bring forward interest rate cuts.
The problem is that the booming international commodity prices that are bringing a smile to dairy farmers' faces are not falling and imported fuel costs remain high, adding to inflationary pressures and making it less than certain that Bollard will move in June.
If he moves too quickly he risks an element of creditor flight, which would result in a major drop in the value of the Kiwi dollar and higher costs for imported goods. We are in a vicious circle here.


But he is expected to continue his infrastructure spend-up - he favours the word "investment" - by backing broadband development.
In particular, he plans to increase New Zealand's international connectivity by investing in a bigger undersea cable.
Communications Minister David Cunliffe may even have succeeded in getting Cullen's backing to make a major investment in expanding broadband capacity within the country to trump National's policy.

Taking back votes from NZ First?

New Zealand Superannuation will be pitched at 66 per cent of the average weekly wage.

Health and education?

New Zealand Superannuation will be pitched at 66 per cent of the average weekly wage.

Lolly scramble?

Beyond that it is a case of how desperate Cullen's colleagues are to hold on to their seats.